SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended March 31, 1997
_ Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number __0-26336_________________________________________
New Paradigm Software Corp.
(Name of Small Business Issuer in Its Charter)
NEW YORK 13-3725764
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
733 Third Avenue, New York, NY 10017
(Address of Principal Executive Offices) (zip code)
(212) 557-0933
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
(Title of Class)
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Redeemable Warrants
(Title of Class)
Check whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during
the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days.
Yes ___X___ No ______
Check if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained within this form, and
no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or
any amendment to this form 10-KSB _
State the issuer's revenues for its most recent fiscal year. $69,976
The aggregate market value of Common Stock held by non-
affiliates of the Registrant based on the closing sale price
on the Nasdaq Bulletin Board on June 27, 1997 was $390,000
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13,
or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
Court.
Yes___________No____X______Not Applicable
APPLICABLE ONLY TO CORPORATE REGISTRANTS
At June 28, 1997 there were an aggregate of 2,451,729 shares
of Common Stock of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one)
Yes _______ No ___X___
TABLE OF CONTENTS
PART I
ITEM PAGE
1. Description of Business 4
2. Description of Property 15
3. Legal Proceedings 15
4. Submission of Matters to a Vote of 15
Security Holders
PART II
5. Market for Registrant's Common 16
Equity and Related Stockholder
Matters
6. Management's Discussion and 16
Analysis of Financial Condition and
Results of Operations
7. Financial Statements 22
8. Changes in and Disagreements with 22
Accountants On Accounting and
Financial Disclosure
PART III
9. Directors, Executive Officers, 23
Promoters and Control Persons;
Compliance with Section 16(a) of
the Exchange Act
10.Executive Compensation 24
11.Security Ownership of Certain 28
Beneficial Owners and Management
12.Certain Relationships and Related 31
Transactions
PART IV
13.Exhibits and Reports on Form 8-K 34
PART I
Item 1. Description of Business
General
New Paradigm intends to devote its efforts in future to the
development of its Internet business (see "Description of
Business - Internet"). However throughout the period which
is covered by this report, the Company was primarily focused
on its COPERNICUS(R) business which it has agreed to sell,
subject to shareholder approval, and its EDI business, which
has already been sold. (See "Description of Business -
General - COPERNICUS" and "Description of Business - General
- - EDI").
General - Sale of COPERNICUS - Circumstances and
Background
The intended sale of Copernicus and the New Paradigm
Architecture is the most significant recent development for
the Company. The Company's management and Board of Directors
have actively explored options for preserving shareholder
value while overcoming the liquidity problems which the
Company has experienced. Many potential transactions were
pursued and examined. In addition, the Company approached
many prospective investors in, and potential acquirers of,
the COPERNICUS asset. These included many investor groups and
large software companies both in the U.S. and overseas.
Summarized below are the steps taken by the Company in
arriving at the decision to seek to sell COPERNICUS.
September 1996
By September 1996 it was obvious to management that the
Company would need to raise significant additional funds in
order to proceed with its business plan. The direct sales
which had been expected had not materialized and revenues
were therefore below the Company's expectations. The Company
decided to reduce costs by eliminating its direct sales
force, all of whom were released at that time. The Company
was at the time negotiating with several parties with a view
to establishing U.S. and international distribution via third
party channels. Management decided to focus the Company's
activities on promoting and supporting these third party
distributors. In September 1996, the Company reached a verbal
agreement with International Business Machines Corporation
("IBM") to sign a distribution agreement (the "IBM
Agreement") whereby IBM would distribute the Company's
COPERNICUS product with IBM's MQ Series message-passing
middleware.
October 1996
In light of the verbal agreement with IBM, the Company
attempted to arrange a best efforts private placement with
its investment bankers, Josephthal, Lyon and Ross
Incorporated. At this time the Company's Common stock was
trading at a daily high of $2.00 or above, reaching a high of
$3 1/8 on October 18, 1996. The private placement was
intended to raise approximately $3 million and was
conditional upon the actual signing of the IBM Agreement.
The financing was documented and meetings with various other
investment banks who were interested in participating in the
private placement were held. Although the principal business
points of the IBM Agreement had been agreed, it took
considerably longer than either the Company or IBM expected
to complete the legal formalities and the agreement was not
finally signed until December 18, 1996.
September - December 1996
During this time, the Company's management pursued a number
of other alternatives to raising the funding necessary to
sustain the Company until the sales expected through IBM and
the other distributors materialized. It was considered
highly unlikely that significant revenues would arise from
these sources before the second half of 1997 at the earliest.
Discussions were held with a number of companies who
expressed an interest in merging with the Company. However,
none of the proposals which management was able to solicit
proved satisfactory (e.g., no immediate injection of funds,
extreme dilution to existing shareholders, minimal revenue
contribution by the other party). Discussions also took
place over a period of several months with a major vendor of
middleware about a possible acquisition of the Company or the
COPERNICUS product, but these were preempted when that vendor
acquired another company with a product which was perceived
by them to be competitive with COPERNICUS. During this
period the Company's total assets fell below $2 million,
raising concerns about the possible delisting of the
Company's Stock form the Nasdaq SmallCap market.
December 1996
The Company also investigated the possibility of a placement
to European investors under Regulation S of the Securities
Act. A presentation to relevant investors by a
representative of the Company's management took place in the
first week of December 1996, and appeared to generate
considerable interest. Nevertheless, during December the
Company's Common Stock price fell from a high of $2.00 on
December 5, 1996 to a low of $1.00 on December 31, 1996.
Management believes that a significant factor in the decline
of the price of the Company's Common Stock was investor
concern about the Company's liquidity problems and the
likelihood of a delisting from the Nasdaq SmallCap market.
Under these circumstances, the interest of overseas investors
disappeared and the Company's investment bankers advised that
a private placement with U.S. investors was now impossible.
Due to the Company's liquidity crisis, all employees not
absolutely essential to the maintenance of current business
and the relationship with IBM were terminated as of December
31, 1996.
January 1997
In January and February 1997, the Company engaged in lengthy
discussions with a high-net worth individual with
considerable experience in the enterprise software market.
The investor carried out certain due diligence on COPERNICUS
and an investment of $2 million in exchange for a 51%
interest in the Company was discussed. As the two parties
moved toward documenting the proposed transaction, the
investor withdrew, based on the investor's unwillingness to
invest in a small and troubled public company.
Loan from Mr. Robert Trump
In order to continue operating, the Company solicited a
$150,000 loan from Mr. Robert Trump which was received on
January 16, 1997. Mr. Trump is an investor, who together
with Midland Associates with whom he is affiliated, is the
Company's largest shareholder. Mr. Trump was approached by
management and requested to make the loan on the basis that
the negotiations and discussions in progress were likely to
lead to a significant investment in the Company in the near
future. The principal terms of this loan were as follows:
o Advance: $150,000.
o Term: 6 months (to expire July 14th, 1997).
o Interest Rate: To be paid in warrants, see below.
o Warrants: 150,000 three-year warrants with an
exercise price of $2.00 per share, in lieu of interest.
Other terms: The 180,000 Midland Warrants, held
by Midland Associates, an affiliate of Mr. Trump, were
amended as follows: The expiration date was changed from
August 11, 1998 to January 16, 2002 and the exercise price
reduced from $3.75 to $2.00 per share. See "Certain
Transactions".
The Loan was used to pay certain pressing payables, including
arrears of salary to all employees.
February 1997
During late January and early February 1997 the Company
reached an advanced stage of negotiating a transaction with
another public company whereby the other company would sell
to the Company a subsidiary with assets in excess of $1.5
million and inject $1 million cash into the Company in
exchange for 10 million shares of the common stock of the
Company. The effect of this transaction would have been to
increase the Company's assets to the point where the Company
would have fulfilled the requirements for continued listing
on the Nasdaq SmallCap market. However, during the due
diligence process, it was discovered that the resulting
combination would have had a significantly greater negative
cash flow than had originally been foreseen. There were also
some unresolved valuation questions relating to the
subsidiary which it was proposed the Company would acquire.
The parties therefore decided not to proceed with the
transaction.
The VIE transaction - preliminary negotiations
In mid-February of 1997, the Company began discussion with
representatives of the group of investors who eventually
formed VIE Systems, Inc. in order to offer to acquire
COPERNICUS. The group of investors included the high net
worth individual with whom the Company had been conducting
detailed discussions in January 1997. This investor group
(which is referred to hereafter as VIE notwithstanding that
VIE Systems, Inc. was not actually formed until some time
later) initially offered $1.6 million and a 5% equity stake
in VIE in order to acquire COPERNICUS and its related assets.
This offer was received in writing on February 20, 1997. In
light of other indications which had been received, it seemed
that a better price could be obtained, and this offer was
therefore declined. However, negotiations continued and the
terms of the offer were improved.
March 1997 - Delisting from Nasdaq SmallCap Market
As a result of the above circumstances, the Company had not
met the $2 million in total assets requirement for continued
listing on the Nasdaq SmallCap market since September 1996.
Accordingly on March 3, 1997 the Company's Common Stock and
Redeemable Warrants were delisted from the Nasdaq SmallCap
market. on the grounds that the Company failed to meet the $2
million in total assets requirement for continued listing.
The Common Stock is now trading on the Nasdaq Bulletin Board.
"Penny stock" rules now apply to the Company's stock. Listing
on the Nasdaq Bulletin Board may result in reduced liquidity
in trading in the Common Stock. Together these circumstances
will likely increase the costs and reduce the likelihood of
success in the event that the Company seeks to raise further
funds through the sale of equity securities.
Series C Redeemable Preferred Stock
On March 13, 1997, Mr. Robert Trump agreed to advance the
Company a further $50,000 which the Company urgently required
in order to continue its operations and meet its payroll
obligations. Management believed that employee morale was low
as a direct consequence of the Company being unable to meet
its payroll obligations, and that further resignations of
staff members would significantly reduce the value of the
Company's primary asset, COPERNICUS. The Company therefore
approached Mr. Trump to seek a further advance to cover
arrears of payroll while management pursued discussions with
Level 8 Systems, Inc., VIE, and other parties to secure the
best possible offer for the COPERNICUS assets.
In order to secure further funds at this time when the
Company was in severe financial difficulties it was agreed
that Mr. Trump would receive sufficient votes via the
creation of a new class of Preferred Stock in order to be
able to maximize the possibility of recovering both this
advance and the earlier advance of $150,000. As a result of
these negotiations the earlier $150,000 advance and the March
13, 1997 $50,000 advance were combined into $200,000 to be
used to subscribe for 800,000 shares of Series C Redeemable
Preferred Stock, $0.01 par value, with the following
principal terms:
o Each Series C Redeemable Preferred Share has four (4) votes
on any matter to be put to a vote of the Company's
shareholders.
o The Series C Redeemable Preferred Stock can be redeemed at
the Company's option at any time upon payment of $200,000.
o The Series C Redeemable Preferred Stock can be redeemed at
the holder's option following any investment in the Company
or a sale of any of the Company's assets where the proceeds
are $2,000,000 or more.
o The Series C Redeemable Preferred Stock will have
preference in the event of any liquidation of the Company
to the extent of $200,000.
The Company therefore intends to redeem the Series C
Redeemable Preferred Stock using $200,000 of the proceeds of
the sale in when the sale of COPERNICUS is approved.
Management Deliberations Concerning Creation of the
Series C Preferred Stock.
Management considered the creation of the Series C Preferred
Stock carefully. Among the factors taken into account were
the following:
o At that time, there were no other sources of funds actually
offered to the Company.
o If further members of staff left the Company's employment
because of the inability of the Company to meet its payroll
obligations, management believed that the value of
COPERNICUS would decrease as the Company would be unable to
service either its existing customers or the new prospects
being introduced by IBM.
o Management believes that these terms were the best it
could secure at that time, and these terms were arrived at
through arms-length negotiations with Mr. Trump.
o The level of four votes per share was required by the
lender in order to give him significant influence in the
approval of any potential sale of COPERNICUS to ensure that
the advance was repaid. The issuance of the Series C
Preferred Stock to Mr. Trump increased his proportion of
the votes on any matter to be put to a vote of the
Company's shareholders from 18% to 64%.
o Management believes that the Company was able to secure
both firm offers and improved terms from Level 8 and then
from VIE as a result of this transaction.
o The board determined that the Company was not required to
solicit proxies for this issuance as BCL paragraph 502 (c)
gives the board the authority to fix the terms of preferred
stock where such terms are not fixed in the charter of the
Company.
Level 8 Systems, Inc.
Throughout the negotiations with VIE, the Company continued
to aggressively pursue other potentially interested parties.
Several of them indicated strong interest, and one, Level 8
Systems Inc. ("Level 8") made a formal offer to the Company.
In order to move quickly, Level 8 verbally offered to make an
immediate advance of $550,000 to the Company to enable it to
make crucial payments to employees and creditors. After
further negotiation, a written offer was made early on March
19, 1997. At this point the Company had received a verbal
offer from VIE to acquire COPERNICUS and therefore sought a
better offer from Level 8. This was not immediately
forthcoming, however Level 8 did agree to improve the terms
of its offer, to include an immediate cash infusion. The
offer accepted by the Company was made later on the same day
(March 19, 1997) with the following principal terms:
o Advance: $550,000.
o Term: 120 days (expiring July 17, 1997).
o Interest Rate: 10% per annum.
o Collateral: Secured by the COPERNICUS product and
related assets.
o Additional Terms: The Company was free to continue to
negotiate with VIE and other third parties. In the event
that the Company were to sell COPERNICUS on or before the
repayment of the loan, a break-up fee would be payable to
Level 8 of $100,000. The proposed sale of COPERNICUS to
VIE as described herein would represent such a sale, and it
is therefore envisaged that the break-up fee will be paid
to Level 8 from the proceeds of the sale when the sale of
COPERNICUS is approved.
The Board of Directors of the Company believed that it was
imperative to receive a significant cash infusion of some
kind since many of the employees were actively seeking other
employment, as they had not received salary for some time.
It was considered necessary to retain at least certain key
employees in order to protect the value of COPERNICUS. This
value would erode swiftly in the event that no staff were
available to maintain the existing customers and to support
the IBM sales effort. Therefore, despite the risks of not
being able to achieve a satisfactory offer for COPERNICUS
during the 120 days, the Board decided to proceed with the
transaction and preserve the COPERNICUS business as a going
concern in order to have the best opportunity to achieve
maximum shareholder value from the COPERNICUS asset. Level 8
is not and has never been an affiliate of the Company, any
member of the Company's management, any of its principal
shareholders or any related parties. Certain employees of
the Company at that time were asked by the management to
consider offers of employment from Level 8 in order to
enhance the value of the sale to the Company's shareholders.
No employees accepted these offers.
The only other offer which the Company had managed to confirm
at the time was a verbal offer from an investor to invest
$500,000 in the Company in exchange for a 70% equity interest
in the Company. The advantage of this proposed transaction
was that it did not impose the same time constraint with
respect to negotiating a satisfactory offer as the Level 8
secured loan. The disadvantage was that it would produce
substantial dilution to existing shareholders so that an
offer for COPERNICUS more than three times as high as the
existing proposals would have been required in order to
obtain the same value for existing shareholders. In view of
the fact that employees had left for more secure employment
and that more were likely to do so, the ability of the
Company to maintain the value of the COPERNICUS asset over a
period longer than 120 days was limited, and it was thus
decided to proceed with the Level 8 proposal.
The VIE transaction - later negotiations
On March 20, 1997, after being advised of Level 8's serious
interest, VIE made a substantially increased offer to the
Company, with the following principal terms:
o VIE would acquire COPERNICUS and certain related assets for
$2 million in cash plus a 10% share in VIE. The parties
would immediately enter into a purchase agreement,
conditional upon shareholder approval, which would take
effect following shareholder approval.
o VIE would immediately advance $400,000 as a secured loan
while the Company sought shareholder approval for the sale.
This would represent a prepayment of the purchase price.
o The Company would provide undertakings from the required
majority of shareholders to vote in favor of the sale at
the shareholders meeting.
o Mr. John Brann, the Company's Vice President of technology,
and Mr. Diran Cholokian, the head of third party sales
would enter into employment agreements with VIE.
o The Company would obtain shareholder approval within 60
days of signing the proposed purchase agreement.
o Pending the shareholders meeting, VIE would immediately
receive a world-wide non-exclusive license for COPERNICUS
together with a perpetual exclusive license in the United
States for the health-care, financial services, food,
airline and hotel industries and an assignment of the IBM
contract. There would be a 5% royalty under this license
payable to the Company. Any payments under the license
prior to closing the purchase agreement would constitute
prepayments under the purchase agreement.
o If for any reason the sale was not approved by shareholders
or there was a change of control of the Company, or in
certain other circumstances defined as "Break-up events",
VIE would have received a break-up fee of the greater of
$250,000 and 50% of the difference in the value of the cash
components of the two competing offers.
While this offer appeared to be the most favorable yet
received from the point of view of shareholder value, the
Company had a number of concerns. Among other points, these
included the sweeping nature of the proposed interim license
(particularly the perpetual nature of the exclusive license
and the fact that it covered all areas where the Company had
experienced any success in licensing COPERNICUS), the lack of
any provision for the Company to continue to utilize
COPERNICUS in any fashion and the probability of the
Company's interest in VIE being diluted by the need for
further financing.
After further discussions with VIE it became apparent that
there was a willingness on both sides to negotiate a mutually
satisfactory transaction.
The Company therefore duly gave notice to Level 8 that it had
received a written offer. Level 8 declined to match the
terms of the offer and instead made the following offer,
which it termed "Final" on March 27, 1997:
Level 8 would acquire COPERNICUS and related assets, the
Company would receive $700,000 in cash and $300,000 in Level
8 Stock.
In view of Level 8's unwillingness to match the terms of the
VIE offer (the Company judged the value of Level 8's offer to
be significantly lower than that of the VIE offer) and VIE's
apparent readiness to negotiate an acceptable proposal, the
Company entered into a letter agreement to negotiate with VIE
on March 31, 1997. This agreement allowed the Company to
continue to solicit interest in COPERNICUS and investments in
the Company during the negotiations and if there were to be
such a sale or investment there would be a break-up fee
payable to VIE of $150,000, unless VIE had previously broken
off negotiations.
Through April and the first week of May negotiations with VIE
continued on both business points and on the most appropriate
legal language until the agreements described in "The VIE
Agreements" were entered into as of May 9, 1997.
Management Deliberations on VIE Offer
Without limitation, among the factors taken into account by
the Company's board of directors in deciding to accept the
offer from VIE were the following:(i) the Company had proven
unable to raise the funding necessary to continue developing
and marketing COPERNICUS, despite aggressively pursing
several different possible methods; (ii) the Company had
insufficient liquid resources to meet its existing and
ongoing liabilities;(iii) the Company was losing staff at a
rapid pace because of its inability to continue to finance
its business, which management believed was likely to reduce
the value of the assets; (iv) the Company had discussed a
sale of COPERNICUS widely among potentially interested
parties in the Middleware and related markets, both in the
United States and overseas, and this was the best offer
available; (v) the offer allows New Paradigm Shareholders to
continue to benefit from any success in sales of COPERNICUS
through the Royalty; (vi) management believed that a higher
value could be achieved from a sale of the COPERNICUS
business as a going concern than in the event the Company was
forced to cease operations.
The Board of Directors decided that a third party analysis of
the fairness of the transaction was not necessary in the
circumstances. Without limitation, some of the reasons why
this course of action was considered to be appropriate and
why management believes this offer to be fair and reasonable
are (i) the Company had solicited offers from a wide range of
potentially interested parties in the industry and related
markets, both within the United States and overseas; (ii) the
Company had serious competitive interest from different
unrelated parties throughout the process; (iii) Level 8, a
significant Company in the middleware market place with a
strong interest in COPERNICUS (as evidenced by the loan
advanced to the Company) declined to match the terms offered
by VIE; and (iv) the Company did not have the cash resources
to finance such a third-party analysis
Once it became apparent that VIE required Mr. John Brann to
agree to join their management as a condition precedent of
any transaction, Mr Brann declared a conflict of interest to
the Company's Board of Directors and abstained from all
further votes on the matter. From that point on, Mr Brann
abstained, with all the other directors voting unanimously in
favor of the decisions to negotiate and then conclude the
transaction with VIE. As soon as the decision to accept the
VIE offer was made, Mr. Brann resigned from the Company's
Board of Directors in order to avoid any conflict of
interest. Since the incorporation of the Company, the Board
of Directors has observed a policy that all potential
conflicts of interest should be declared to the Board before
a vote is taken on any matter.
General - COPERNICUS
Until May 9th 1997, New Paradigm was primarily engaged in the
development, marketing, licensing and support of its
COPERNICUS software product. As of May 9, 1997 the Company
entered into an agreement (the "Purchase Agreement"), to
sell, subject to shareholder approval, the rights to
COPERNICUS, the New Paradigm Architecture and certain related
assets to VIE Systems, Inc., a Delaware corporation ("VIE")
for $2,050,000 in cash and a 5% royalty on future COPERNICUS
related license fees payable commencing after the first 12
months. Subject to VIE's approval, the Company will have the
right to enter into OEM agreements with VIE on commercially
reasonable terms, to incorporate COPERNICUS within future
products which the Company may develop or acquire. Under the
Purchase Agreement the Company has appointed VIE as its
exclusive agent for the operation of all aspects of the
COPERNICUS related business and VIE is entitled to retain all
revenues received in connection therewith. This agreement
will terminate at the earlier of the closing of the sale or
180 days from May 9, 1997. VIE has entered into Voting
Agreements with the holders of 68.1% of the voting rights
entitled to vote at a meeting of New Paradigm Shareholders,
and the Company therefore expects the sale to be approved and
completed during July 1997. In the event that the sale is
not approved, the Company sells the COPERNICUS assets to a
third party, or in certain other circumstances VIE is
entitled to receive a break-up fee of $350,000.
As of May 9, 1997 the Company entered into a license
agreement (the "VIE License") to license certain rights to
its COPERNICUS product and to assign certain agreements to
VIE. The VIE License gives VIE a five year exclusive license
to market COPERNICUS to the financial services, healthcare,
food & government industries in US & Canada and a perpetual
non-exclusive worldwide license with respect to all
industries. Under the VIE license the Company is entitled to
receive a 5% royalty on all license fees received by VIE
relating to the COPERNICUS product. The license also permits
VIE to produce the product on additional platforms and
enhance the product as it sees fit. The source code for the
product may not be distributed to another party without the
prior written consent of the Company. Finally the Company has
assigned to VIE certain agreements, including a distribution
agreement with IBM. The VIE license will terminate upon the
closing of the sale under the Purchase Agreement and any
royalties payable thereunder shall be offset against the
purchase price payable at the closing.
Until the closing of the contemplated sale of COPERNICUS
pursuant to the Purchase Agreement, New Paradigm will
continue to be engaged, through its exclusive agent, VIE, in
the development, marketing, licensing and support of its
COPERNICUS software for large-scale computer users. Most
large organizations have many different computer systems. The
need to pass information among those often incompatible
systems is growing rapidly. Passing information among
disparate computer systems is called "systems integration."
COPERNICUS automates systems integration by converting the
data entered into or generated by one program or system into
the form needed by another program or system. The Company
believes that its customers can achieve systems integration
using COPERNICUS in a more timely and cost-effective way than
the traditional approach of writing custom software on a
case-by-case basis. An application for a United States patent
on COPERNICUS is pending.
COPERNICUS replaces the laborious construction of custom
systems integration programs with a method of systems
integration that is activated by pointing and clicking a
"mouse" in the same manner as with widely used consumer and
business software programs. The Company believes COPERNICUS
can bring improvements in productivity to systems integration
comparable to those produced by using a personal computer
spreadsheet to replace manual calculations.
General - EDI
Until April 1, 1997, through its wholly owned subsidiary, New
Paradigm Commerce ("NPC") (formerly New Paradigm Golden
Link), the Company operated a service bureau business
providing electronic data interchange ("EDI") services (the
conveying of business documents electronically). This EDI
business was not operating profitably, and the Company no
longer had the resources to invest in its further
development. Management therefore concluded that the best
course of action was to dispose of this business. As of April
1, 1997, the Company sold its EDI business to Custom
Information Systems Corp. of New York ("CIS") for $6,000 and
a note repayable monthly over three years with a face value
of $355,000 and a present value of approximately $300,000.
CIS operates a similar EDI service bureau in Manhattan. To
date (June 28th 1997), all payments due under the note have
been received in a timely fashion.
History - COPERNICUS
COPERNICUS was invented by John Brann, a former director and
former officer of the Company, prior to his employment with
the Company and prior to his earlier employment with
Management Technologies, Inc. ("MTI"). Mr. Brann assigned all
of his right, title and interest in and to COPERNICUS and the
method of constructing software which it employed (the "New
Paradigm Architecture") to Lancer Holdings Inc. ("Lancer"),
formerly called Mark Blundell & Associates, Inc., a New York
corporation controlled by John Brann and Mark Blundell, who
is a director and the principal executive officer of the
Company. Lancer was formed in July 1992. Pursuant to a
license agreement dated as of January 13, 1993, Lancer
granted to MTI, where both John Brann and Mark Blundell were
then employed, a license to distribute software incorporating
the New Paradigm Architecture to banks on an exclusive basis
and to distribute such software to other customers on a non-
exclusive basis. MTI funded the development of a prototype of
COPERNICUS and began conducting several pilot programs in the
banking industry.
The Company was organized in July 1993 to further develop
COPERNICUS and to develop and market products outside the
banking industry. The Company was initially capitalized by
MTI.
In connection with the formation of the Company both Lancer
and MTI transferred their licenses to the Company and the
Company granted to MTI a non-exclusive license to distribute
software incorporating the New Paradigm Architecture to
banks. John Brann and Mark Blundell became executive officers
of the Company and the infrastructure and the support for the
New Paradigm Architecture and all software applications
employing the New Paradigm Architecture ("the New Paradigm
Applications") were transferred from MTI to the Company. As a
part of a strategic shift in MTI's operations, MTI determined
in August 1994 to cease marketing products using the New
Paradigm Architecture and MTI's remaining license was
terminated. The Company acquired the New Paradigm
Architecture and COPERNICUS and related intellectual property
rights from Lancer as of March 22, 1995. Neither Lancer nor
MTI retains any rights to the New Paradigm Architecture or
COPERNICUS. See "Certain Relationships and Related
Transactions."
Following its initial public offering in August 1995, the
Company sought to market COPERNICUS to large-scale computer
users, both directly with its own sales force and indirectly
through systems integrators and other software vendors.
Systems integrators marketed COPERNICUS in connection with
their services, and software companies acted as value-added
resellers ("VARs") of COPERNICUS by incorporating it into
their own software products. Royalties from VARs are based on
sales of their products. COPERNICUS will allow a VAR's
software and its customers' software to work together. Prior
to signing the Purchase Agreement, the Company had entered
into the following agreements to license or distribute
COPERNICUS:
o License agreements with Marriott International, Inc.,
and its subsidiaries and affiliates (collectively
"Marriott"), New York Life Insurance Company,
Transquest Information Solutions ("Transquest"),
Massachusetts Institute of Technology ("MIT"), Bell
Atlantic and the Canadian Imperial Bank of Commerce
("CIBC"). These agreements permit the above named
entities to use COPERNICUS. The fees collected from
these licenses vary depending on the scope of the
license.
o An agreement with International Business Machines
Corporation ("IBM") whereby IBM would seek to
distribute COPERNICUS with IBM's MQSeries(tm) message-
passing middleware.
o An agreement to distribute COPERNICUS in Canada with
New Venture Technologies Ltd., a software reseller and
systems integration consulting company, an agreement
with EXEL to distribute COPERNICUS in the United
Kingdom and an agreement with Rivergate Technologies
to distribute COPERNICUS for the Company worldwide.
o A License with Praxis International, Inc. ("Praxis")
to incorporate COPERNICUS into its OmniReplicator(tm)
software product, which is designed to permit the
duplication of databases on different types of
computer systems.
These agreements have been assigned to VIE under the VIE
License.
History - New Paradigm Commerce
Beginning in May 1995, the Company worked to establish a
presence in the EDI service center business. As of April 1,
1997, at the time of the sale of this business, NPC had
connections to two dozen providers of retail goods and
services to the public ("Trading Partners") and had signed up
approximately 180 suppliers ("Suppliers") (41 at March 31,
1996) to those Trading Partners as customers.
Most Suppliers who used the Company's EDI services did so
because a Trading Partner required that all of its Suppliers
send all invoices for their products electronically if they
were to do business. These Trading Partners were primarily
large corporations seeking to have the maximum possible
number of their suppliers connected to them electronically to
avoid the expensive handling costs associated with paper
based systems. If the Supplier wished to create an EDI
capability internally, the Supplier would have to buy EDI
software, install that software on an existing or new
computer, learn the software, transmit the data generated
from the software (by modem or email), develop the proper EDI
format for the Trading Partner selected and test the
connection with the Trading Partner with which it was
connected. Many Suppliers were not able, or willing, to spend
the resources to make the connection to their Trading
Partners, particularly where they did business with several
different Trading Partners. As a result they often looked to
outsource their EDI functions. NPC took the information for
the EDI transaction via fax, letter or email and reformatted
that information and transmitted that information in the
appropriate EDI format.
NPC was not operating profitably, and the Company no longer
had the resources to invest in its further development, so as
of April 1, 1997 the business of NPC was sold for cash and a
note with a face value of $361,000 and a present value of
approximately $300,000. (see "Description of the Business -
General - EDI")
History - Netphone
On October 9, 1995 the Company acquired from Electric Magic
Company the Netphone product, which permits users of
Macintosh(R) computers to conduct worldwide long distance
telephone conversations over the Internet. While the
acquisition of Netphone was not part of the Company's
strategic goal of broadening the New Paradigm Architecture,
it represented an opportunity to acquire a functional product
in the expanding Internet market. The Company subsequently
received an offer from the Camelot Corporation ("Camelot") to
acquire these assets from the Company for a package of stock
and cash comparable to the acquisition price paid by the
Company and an agreement to pay the Company a royalty for
each unit sold by Camelot in the future. This allows the
Company to benefit from any success Netphone may experience
from the wider distribution of the product through Camelot's
existing retail marketing channels. To date the Company has
received no significant revenue from this royalty arrangement
and there can be no assurance that any such significant
revenues will arise.
Internet
Through its wholly owned subsidiary New Paradigm Inter-Link,
Inc. ("NPIL"), which began operations in December 1995, the
Company provides Internet services to corporations and other
organizations. Customers include Novartis and the Association
of the Bar of the City of New York. The Company intends to
develop this business by launching new products and services
connected with the Internet. There is no assurance that the
Company will be able to develop or acquire such products and
services or that if it does they will be acceptable to the
market. The Internet is a relatively new and rapidly
expanding market. Gartner Group ( a leading industry
analyst) estimates that by 2001, 60% of the US workforce will
have a justifiable business need for Internet access. By the
same date, they estimate that more than 8 million households
will access the Internet using ISDN lines (digital telephone
lines offered by principal telephone companies suitable for
accessing the Internet) and a further 3 million homes will
access the Internet using cable modems. World-wide Internet
use is currently estimated at 40 million users. With
potential access to such numbers, many corporations are
seeking to ensure that they have a presence on the Internet.
Such a presence is established through a collection of text,
graphics and small programs known as a "Web site" maintained
on a computer known as a Web server and viewed by users from
all over the world who are connected to the Internet through
the use of a Web browser such as Netscape Navigator or
Microsoft Explorer. The Company seeks to assist companies
with creating that Internet presence and also to exploit
other business opportunities which may arise in servicing the
Internet community.
Internet - Website services
NPIL provides organizations with the ability to utilize the
Company's expertise in creating a Web site. This expertise
includes assembling an appropriate team of independent design
consultants and, if necessary, programmers; designing the
site from both technical and aesthetic perspectives,
implementing the design, and then providing Web server
hosting services away from a customer's own internal network
to ensure security. NPIL specializes in providing custom
facilities to enable a customer's presence on the Internet to
be constantly evolving and interesting without adding to
their existing workload. For example, the site for the
Association of the Bar of the City of New York is remotely
updated by association staff. A small software program
("applet") created by NPIL staff in Java - the most common
computer programming language for the Internet today - allows
customers to utilize information in the format in which it
was created under existing word processor programs such as
Microsoft Word to automatically update their Web site from
their own offices. No translations or transitions are
required - the customer's staff member simply uses the common
"cut and paste" technique utilized within many programs to
move the required document into the NPIL applet. A typical
site brings in initial revenues of approximately $20,000 -
$30,000 on completion with continuing revenues for
maintenance and changes throughout the year which are
expected to amount to $1,000- $3,000 per annum. The Company
has created 5 Web sites for customers of this service to
date. Revenues in fiscal 1997 were $62,420 from 3 such
sites.
Examples of Web sites created by New Paradigm include:
o Novartis - site for its "Program" product:
www.programpet.com
o Association of the Bar of the City of New York:
www.abcny.org
o Nuway Corporation: Corporate Website, site for
moistmates product: www.nuwaycorp.com
o Smolin Lupin, accountants: corporate Website:
www.cpasmolinlupin.com
o Novartis - site for its "Sentinel" product:
www.petprotect.com
o New Paradigm: corporate Website: www.newparadigm.com
o Proballfan: NFL football site written by fans:
www.proballfan.com
Website services - marketing and distribution
The Company is marketing its services through a mix of direct
contact with prospective clients and indirect sales. One
member of staff is engaged full time in the direct sales
activity which accounts for approximately 50% of the current
customer list . Indirect sales, which account for the
remaining 50%, are primarily through advertising agencies
working on integrated media campaigns who subcontract the
Internet portion to NPIL.
Internet - Other products
The Company is also involved in research and development for
other products and services which can be effectively launched
and marketed through the Internet. The nature of the
Internet market is that the time to market from the formation
of a concept can be very short. The Company is currently
working on three projects which it expects to launch during
Fiscal 1998. These products have not been announced as this
could provide significant commercial advantage to the
Company's competitors. (The general areas for these three
projects are (i) intellectual property; (ii) the Internet
itself and (iii) education.) In each of two of the projects
the Company is working with a third party that is providing
product or market specific information and will be entitled
to a share of the revenues or a stake in a joint venture
between the Company and the third party for their efforts.
In neither case has the arrangement yet been finalized. The
Company expects to invest an aggregate of approximately
$200,000 in the launch of these three products, in addition
to the research and development work of the Company's staff.
There can be no assurance that the Company will be able to
reach satisfactory agreement with the third parties involved,
or that it will be able to complete the research and
development work needed to launch the products, or that if
they are launched such products will achieve any degree of
market success.
Research and Development
From its inception until the signing of the Purchase
Agreement, the Company focused its internal development
efforts on COPERNICUS and the New Paradigm Architecture. In
addition, the Company has employed independent consultants to
perform certain development functions. Research and
development expenses, which include salaries and other
employee costs of the Company's product development
personnel, for the fiscal year ended March 31, 1995 were
$331,821 (17% of total expenditures). Beginning July 1, 1995
the Company recognized technological feasibility of
COPERNICUS and began capitalizing the development costs of
COPERNICUS in accordance with Statement of Accounting
Standards ("FASB") No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed."
The Company capitalized $218,950 of development costs
relating to COPERNICUS and expended an additional $60,344 for
Research and Development expenses during the year ended March
31, 1996. The Company capitalized $495,696 of development
costs relating to COPERNICUS during the year ended march 31,
1997. There were no research and development expenses for
that year. For a discussion of the history of the
development of COPERNICUS and the New Paradigm Architecture,
see "Description of Business -- History."
Research and development will remain vital to the Company's
efforts to remain competitive in the Internet business. The
technology in that marketplace is evolving at a very rapid
pace, and new techniques must be learned constantly. The
Company currently has two staff involved in Research and
Development, and is seeking to recruit a third. The Company
is presently significantly dependent on the services of Mr.
Ali Faraji in this area. Mr. Faraji is not the subject of an
employment contract and their can be no assurance that he
will remain employed by the Company. There can also be no
assurance that the additional engineer can be recruited or if
any of the current Research and Development staff leave that
they can be replaced at a cost acceptable to the Company.
Competition
The Internet marketplace, while rapidly expanding, is
intensively competitive. There are hundreds or thousands of
companies competing for the Web-site creation and hosting
business. These range from college or even high-school
students working at low cost from their home, to the largest
providers of telecommunications services such as AT&T or MCI.
The Company will seek to compete by offering high quality
service at reasonable cost and by differentiating itself with
innovative products and services. Many of the Company's
competitors have much greater resources and name recognition
than the Company. There can be no assurance that the Company
will succeed in competing effectively in this marketplace, or
that if it does succeed in winning business that it will be
able to continue to do so.
Intellectual Property Rights
On March 23, 1995, the Company acquired the intellectual
property rights to COPERNICUS and the New Paradigm
Architecture from Lancer. See "Directors and Executive
Officers of the Registrant" and "Certain Relationships and
Related Transactions -- Acquisition of the New Paradigm
Architecture." The intellectual property rights acquired
from Lancer include one application for a United States
patent relating to COPERNICUS, which application is now
pending in the USPTO, and corresponding applications (or the
right to file corresponding applications) in 24 foreign
countries. Patents have been granted in Pakistan and France.
While there can be no assurance when or if a United States
patent will be granted, management believes that COPERNICUS
is patentable. These rights will be transferred to VIE on
the closing of the Purchase Agreement.
In the Internet field, the Company does not believe that any
of the software which it has developed to date is patentable.
The Company relies upon a combination of trade secret,
nondisclosure and other contractual arrangements, and patent,
copyright and trademark laws to protect its rights to
intellectual property. The Company generally enters into
confidentiality agreements with its employees, consultants,
distributors, value-added resellers and potential customers
and limits access to and distribution of proprietary
information to licensed users. There can be no assurance that
the steps taken by the Company will be adequate to deter
misappropriation of proprietary information, that the Company
will be able to detect unauthorized use of proprietary
information or that the Company can afford the high cost
required to enforce its intellectual property rights.
Further, no assurance can be given that nondisclosure and
other contractual arrangements to protect the Company's
proprietary rights will not be breached, that the Company
will have adequate remedies for any breach or that trade
secrets will not otherwise become known to or be
independently developed by competitors. The failure or
inability of the Company to protect proprietary information
could have a material adverse effect on the Company's
business, operating results and financial condition.
Employees
As of June 15, 1997, the Company employed 9 full-time
employees. None of the Company's employees is represented by
a labor union or is subject to a collective bargaining
agreement. The Company believes that its employee relations
are satisfactory. The number of the Company's employees
declined because the Company released 6 employees in its
Atlanta office as it withdrew from direct sales, and 10 more
in New York when staff reductions were made to reduce
expenses on December 31, 1996. In addition 6 employees
transferred to CIS or VIE as they began operating businesses
previously operated by the Company.
Item 2. Description of Property
The Company's corporate headquarters is located on the 7th
floor of 733 Third Avenue, New York, New York (the
"Premises"). The Premises are currently being sublet from Go
America Tours, Inc. Go America's master lease expires on
August 31, 1999. In view of the reduction in the number of
the Company's employees from a high of 44 to 9 at present,
the Company no longer needs the 12,500 square feet of space
it subleases and is seeking sub-tenants to occupy all or part
of the space. Based upon its preliminary discussions with
real estate brokers, the Company believes that it will be
able to secure such sub-lessees at approximately the same
rate as in its own sub-lease (presently approximately $23,000
per month). The Company anticipates that, in the event that
it is successful in sub-leasing all of the space it currently
occupies, it will experience no difficulty in obtaining
suitable space for the remaining 9 employees. It is
estimated the cost of such space would be approximately
$6,000 per month.
Item 3. Legal Proceedings
The Company is not involved in any material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security
Holders
Not applicable
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
(a) Principal Market.
The Registrant's Common Stock and Redeemable Warrants are
quoted on the Nasdaq Bulletin Board.
(b) Approximate Number of Holders of Equity.
The number of record holders of the Common Stock was
approximately 86 and the number of record holders of
Redeemable Warrants was 46 as of March 31, 1997.
(c) Frequency and Amount of Dividends.
To date, the Company has not paid any cash dividends. The
Company does not anticipate paying any dividends in the
foreseeable future. The Company intends to retain any future
earnings to finance the growth and development of its
business. Any future determination as to the payment of
dividends will be at the discretion of the Board of Directors
of the Company and will depend on the Company's operating
results, financial condition, capital requirements and such
other factors as the Board of Directors may deem relevant.
(d) High and Low Sales Prices of Common Equity and Redeemable
Warrants
The following table sets forth, for the periods indicated,
the high and low closing prices for the Common Stock and
Redeemable Warrants as reported by the NASDAQ SmallCap Market
through March 3, 1997 and afterwards as reported on the
Nasdaq Bulletin Board:
<TABLE>
<S> <C> <C>
Common Stock Redeemable Warrants
1996 Fiscal Quarters High Low High Low
Second Quarter
(Commencing August
11, 1995)(1) $7.50 $5.00 $2.00 $0.75
Third Quarter 6.50 4.50 1.625 0.75
Fourth Quarter 6.125 4.75 1.625 1.125
1997 Fiscal Quarter
First Quarter 6.00 1.875 1.375 0.375
Second Quarter 3.00 1.125 0.875 0.25
Third Quarter 3.125 1.00 0.75 0.25
Fourth Quarter 1.813 0.50 0.25 0.063
<FN>
<F1> (1) The initial public offering of the Common Stock and
Redeemable Warrants commenced on August 11, 1995. The initial
public offering prices of the Common Stock and Redeemable
Warrants were $6.50 per share and $.10 per Redeemable
Warrant.
</TABLE>
The foregoing prices and quotations reflect inter-dealer
prices without retail mark-up, mark-down or commissions. The
foregoing quotations may not represent actual transactions.
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The selected financial data of the Company presented below
for, and as of the end of, the fiscal years ended March 31,
1996 and 1997 have been derived from the financial statements
of the Company, which have been audited by BDO Seidman LLP,
independent certified public accountants. The Company was
incorporated in July 1993 and commenced operations in
November 1993. The data set forth below should be read in
conjunction with the Company's financial statements and
related notes thereto included elsewhere herein. The Company
has entered into agreements to sell two of its major
businesses - COPERNICUS and the EDI business. As a result
the statements of operations for the fiscal years ended March
31, 1997 and 1996 and the Balance Sheet as at March 31, 1997
have been prepared to reflect continuing operations. The
Loss for discontinued operations is shown in Note 14 to the
financial statements.
Statement of Operations Data
<TABLE>
<S> <C> <C>
Year Ended March 31, 1997 Year Ended March 31, 1996
Revenues $69,976 $ -
Expenses 1,627,163 1,316,332
----------- -----------
Loss from operations (1,562,187) (1,316,332)
Other income (expense) 25,099 (302,154)
----------- -----------
Loss from continuing
operations (1,537,088) (1,618,486)
Loss from discontinued
operations (1,438,319) (1,941,806)
----------- -----------
Net Loss $(2,975,407) $(3,560,292)
----------- -----------
Net Loss per common share
from continuing operations $(0.63) $(0.93)
----------- -----------
Net Loss per common share
from discontinued operations (0.58) (1.11)
----------- -----------
Net Loss per common share (1) $(1.21) ($2.04)
Weighted average common
shares outstanding (1) 1,743,472 2,449,428
Balance Sheet Data
March 31, 1997
--------------
Total assets $1,357,703
Total current assets 411,267
Assets held for sale 691,491
Total current liabilities 1,427,817
Long-term debt 0
Current liabilities 1,427,817
Redeemable Preferred Stock 200,000
Deficit (9,109,599)
Total capital deficit $(271,114)
<FN>
<F1>
(1) See Notes to Financial Statements for an explanation of
the determination of the number of shares and share
equivalents used in computing share amounts.
</FN>
</TABLE>
Overview
The Company has entered into agreements to sell two of its
major businesses - COPERNICUS and the EDI business. As a
result the statements of operations for the fiscal years
ended March 31, 1997 and 1996 and the Balance Sheet as at
March 31, 1997 have been prepared to reflect continuing
operations. The Loss for discontinued operations is shown in
Note 14 to the financial statements. The discussion and
analysis which follows therefore considers separately the
continuing and discontinued operations.
In its continuing operations the Company had net losses of
$1,537,088 for the year ended March 31, 1997 and $1,618,486
for the year ended March 31, 1996. The Company's revenues
from continuing operations for the fiscal years ended March
31, 1996 and 1997 were nil and $69,976, respectively. The
Company's subsidiary, NPIL had 3 customers for its Web site
creation and maintenance services as at March 31, 1997 and 5
as at June 30, 1997.
In its discontinued operations the Company had net losses of
$1,438,319 for the year ended March 31, 1997 and $1,941,806
for the year ended March 31, 1996. The Company's revenues for
the fiscal years ended March 31, 1997 and 1996 were $622,898
and $425,953, respectively. These revenues were primarily due
to the licensing of COPERNICUS in 1996. In 1997, $380,671 was
derived from COPERNICUS licensing and royalties and $234,048
was derived from EDI service bureau revenues. The Company's
subsidiary, NPC, had 41 EDI customers in the year ended March
31, 1996 and approximately 180 EDI customers in the year
ended March 31, 1997.
Following the Company's initial public offering ("IPO") in
August 1995, the Company significantly expanded its
operations and particularly its sales activity relating to
COPERNICUS. Five additional staff members were recruited and
the sales operation moved to Atlanta. The Company closed its
sales office in Atlanta in January, 1997.
The Company's revenues and profitability may vary
significantly both in the case of consecutive quarters and in
the case of a quarter compared to the corresponding quarter
of the preceding year. Such variations may result from, among
other factors, lengthy development time for the Company's
products and services, timing of new product and service
introductions by the Company and its competitors, changes in
levels of the Company's operating expenditures, including the
Company's expenditures on research and development, the size
and timing of customer orders, the amount and timing of
initial fees for creating Web sites, royalty payments and
license fees by licensees, as well as consulting, training
and maintenance fees, increased competition, reduced prices,
the effect of currency exchange rate fluctuations, delays in
the development of new products and services, the costs
associated with the introduction of new products and services
and the general state of national and global economies. The
Company expects to derive substantially all of its revenues
from initial fees for creating Web sites, and consulting,
training, service and maintenance fees. Accordingly, the
Company's revenues will vary with the demand for its products
and services. As a result of such factors, the Company's
revenues and profitability for any particular quarter are not
necessarily indicative of any future results. Fluctuations in
quarterly results may also result in volatility in the price
of the Company's securities.
Results of Operations
Revenues. Revenues from continuing operations during the
fiscal year ended March 31, 1997 increased from $0 to $64,976
as NPIL made its first sales during fiscal 1997.. These
revenues primarily consisted of revenue from the initial fees
for the creation of Web sites.
Revenues from discontinued operations during the fiscal year
ended March 31, 1997 increased by $196,945 (46%) to $622,898
over the year ended March 31, 1996. In 1996, these revenues
primarily consisted of revenue from the licensing of
COPERNICUS to direct end-users. In 1997, $380,671 was derived
from COPERNICUS license fees and royalties. In 1996, $19,421
of revenues arose in the NPC EDI service bureau business. In
1997 this increased by $214,807 (1,106%) to $234,048.
Expenses. The Company's expenses primarily comprise salaries
and related employee costs, research and development costs,
professional fees, marketing expenses, general and
administrative expenses, occupancy expenses and depreciation
and amortization.
Expenses relating to continuing operations during the fiscal
year ended March 31, 1997 increased by $310,831 (24%) over
the fiscal year ended March 31, 1996.
Expenses during the fiscal year ended March 31, 1997 relating
to discontinued operations decreased by $306,542 (13%) over
the fiscal year ended March 31, 1996.
For the continuing operations, employee costs increased by
21% to $630,616 in the fiscal year ended March 31, 1997,
compared to $520,356 in the fiscal year ended March 31, 1996.
This was due to the hiring of additional staff members for
NPIL and an increase in the number of staff members employed
by the Company in administrative and corporate positions to 9
as the overall staff of the corporation increased to 44.
However by March 31, 1997 the number of staff members
involved in such tasks had been reduced to 4, and the total
number of staff members to 9.
For the discontinued operations, employee costs increased
marginally by 1% to $1,047,606 in the fiscal year ended March
31, 1997, compared to $1,008,015 in the fiscal year ended
March 31, 1996.
The Company did not recognize any research and development
expenses in the fiscal year ended March 31, 1997, compared to
$60,344 in the fiscal year ended March 31, 1996. This
decrease is due to the fact that the Company recognized
technological feasibility of its COPERNICUS product on July
1, 1995. According to FASB No. 86, "Accounting for Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed,"
the Company believes it is now required to capitalize its
COPERNICUS research and development expenses. Capitalized
software expenses consist principally of salaries and certain
other expenses related to development and modifications of
COPERNICUS capitalized in accordance with the provisions of
FASB No. 86. Amortization of capitalized software costs is
provided at the greater of the ratio of current product
revenue to the total of current and anticipated product
revenue or on a straight-line basis over the estimated
economic life of the software, which is not more than five
years. $218,950 was capitalized during the year ended March
31, 1996 and $276,746 was capitalized during the year ended
March 31, 1997.
Professional fees relating to continuing operations decreased
by 4% to $244,731 in the fiscal year ended March 31, 1997,
compared to $256,148 in the period ended March 31, 1996. The
decrease is primarily due to the fact that there were costs
related but not directly attributable to the IPO in fiscal
1996. No such expenses arose in 1997.
Professional fees relating to the discontinued operations
deceased by 39% to $223,213 in the fiscal year ended March
31, 1997, compared to $364,050 in the period ended March 31,
1996. The decrease is primarily due to the fact that the
Company incurred legal fees during fiscal 1996 to derive
standardized licensing and maintenance agreements. The use
of these agreements as the basis for negotiations in fiscal
1997 produced a reduction in related legal fees.
Marketing expenses relating to continuing operations
increased by 86% to $164,238 in the fiscal year ended March
31, 1997 compared to $88,461 in the fiscal year ended March
31, 1996. This is principally due to increased fees from the
Company's public relations consultants as the Company engaged
in a marketing and promotional campaign. A proportion of the
costs of this campaign were allocated to developing the
corporate profile. The campaign was terminated in September
1996 and the Company no longer employs public relations
consultants.
Marketing expenses relating to discontinued operations
decreased by 38% to $323,725 in the fiscal year ended March
31, 1997 compared to $523,624 in the fiscal year ended March
31, 1996. This is principally due to the decision to
concentrate on indirect rather than direct channels and the
consequent termination of the Company's advertising campaign
in September 1996.
General and administrative expense relating to continuing
operations increased by 58% to $340,744 in the fiscal year
ended March 31, 1997, compared to $215,199 in the fiscal year
ended March 31, 1996. This was due to an increase in the
average number of staff employed by the Company in the year
ended March 31 1997 compared to the previous year.
General and administrative expense relating to discontinued
operations decreased by 8% to $265,087 in the fiscal year
ended March 31, 1997, compared to $288,756 in the fiscal year
ended March 31, 1996. This is principally due to the decision
to concentrate on indirect rather than direct channels and
the consequent reduction in the number of staff employed in
direct sales and other COPERNICUS related activities.
Occupancy costs did not change significantly. 1997 occupancy
costs for continuing operations were $197,230 and in 1996:
$198,356. For discontinued operations 1997 occupancy
expenses were $20,310 and 1996 occupancy expenses were
$20,000.
Depreciation and amortization expenses relating to continuing
operations increased by 31% to $49,604 in the fiscal year
ended March 31, 1997 compared to $37,803 in the fiscal year
ended March 31, 1996. Depreciation and amortization increased
because of an increase in fixed assets relating to continuing
operations from March 31, 1996 to March 31, 1997.
Depreciation and amortization expenses relating to
discontinued operations increased by 88% to $181,276 in the
fiscal year ended March 31, 1997 compared to $96,335 in the
fiscal year ended March 31, 1996. Depreciation and
amortization increased because of the amortization on the
capitalization of the COPERNICUS software product and an
increase in fixed assets relating to discontinued operations
from March 31, 1996 to March 31, 1997.
In December 1996, the Company entered into a sublease with
Go-America Tours in respect of approximately 12,500 square
feet of space at 733 Third Avenue, New York, New York to be
the Company's principal place of business. Payments under
this lease which runs until August 31, 1999 are expected to
total $694,000 of which $275,000 is due in fiscal
1998,$291,000 in fiscal 1999 and $128,000 in fiscal 2000.
The Company has made no other material capital commitments.
The Company's net operating loss carryforwards and deferred
tax asset account are approximately as follows:
<TABLE>
<S> <C> <C> <C>
Period or Year Net operating Net Deferred
ended March 31, Year of expiration loss carryforward tax asset
- ---------------------------------------------------------------------------
1994 2009 $589,000 $ -
1995 2010 1,954,000 -
1996 2011 3,542,000 -
1997 2012 2,958,000 -
---------
9,043,000 $ -
</TABLE>
The tax benefit of these losses (approximately $4,140,000 and
$2,786,000 at March 31, 1997 and 1996 respectively) is
subject to significant limitations due to the change in
control for income tax purposes resulting from the Company's
IPO in August 1995. The tax benefit of these losses has been
fully reserved by a valuation allowance of the same amount
due to the uncertainty of its realization.
Foreign Exchange. The Company currently has no exposure to
foreign currency exchange rate fluctuations. In the future
the Company may seek to minimize its exposure to foreign
currency exchange rate fluctuations by requesting that its
customers, distributors, including systems integrators, and
VARs located outside of the United States enter into
contracts denominated in United States dollars or by entering
into transactions to attempt to hedge some of the risks of
foreign currency exchange rate fluctuations.
Liquidity and Capital Resources
The Company has financed its operations to date primarily
through public and private sales of its debt and equity
securities. The Company has raised a total of approximately
$10.6 million from these activities. Of this total, $50,000
was raised in connection with the initial capitalization of
the Company, $1,141,000 was raised in a private placement of
equity securities in October 1993; $450,000 in a private
placement of equity securities and promissory notes in
October 1994 (the "1994 Financing"), $1,312,500 in a private
placement of equity securities and promissory notes in March
1995 and April 1995 (collectively, the "1995 Financing"),
$6,891,933 in the Company's IPO and $200,000 in the private
placement of Series C Redeemable Preferred Stock in March
1997. Of the funds raised in the 1994 Financing, $130,000 of
promissory notes were repaid out of the proceeds of the 1995
Financing, and the remaining principal of and interest on the
notes issued in the 1994 Financing and the 1995 Financing
were repaid from the net proceeds of the Company's IPO.
Additionally on March 19, 1997 the Company borrowed $550,000
from Level 8 Systems, Inc. by means of a loan secured by
COPERNICUS and related assets. Level 8 Systems, Inc. agreed
to make this advance as part of negotiations in which it
sought to acquire COPERNICUS and related assets from the
Company. This loan is due to be repaid on July 18th 1997.
On June 27 1997, the Company was received from VIE a loan of
$50,000 secured on all the assets of the Company and an
advance of $13,500 against royalties under the VIE License.
These amounts are to be deducted from the purchase price due
on closing of the transactions contemplated by the Purchase
Agreement.
In the fiscal years ended March 31, 1994 and March 31, 1995,
the Company borrowed $466,409 from a shareholder, MTI (MTI is
no longer a shareholder of the Company), pursuant to a
subordinated financing agreement. This subordinated debt was
canceled pursuant to a Settlement Agreement with MTI dated as
of May 26, 1995. This amount is not included in the $10.6
million figure set forth in the preceding paragraph.
Pursuant to a certain Accounts Receivable Purchase and Sale
Agreement between the Company and MTB Bank dated June 19,
1995 (the "Factoring Agreement"), the Company sold,
transferred and assigned all of its right, title and interest
in certain receivables due to the Company in consideration of
the payment of approximately $100,000 by MTB Bank to the
Company. The Company used the proceeds of this factoring
arrangement for working capital and other general corporate
purposes. This loan was repaid with interest from the
proceeds of the IPO.
Accounts payable and accrued expenses increased to $806,690
at March 31, 1997 from $220,341 at March 31, 1996. Such
decrease in accounts payable and accrued expenses is
primarily due to the inability of the Company to pay its
creditors in a timely manner at March 31, 1997 and a
consequential significant increase in accounts payable.. At
March 31, 1997, the Company had a working capital deficit of
approximately $1,017,000.
Of the proceeds of $2,050,000 due at the closing of the
Purchase Agreement, the Company expects to utilize $200,000
to redeem the Series C Redeemable Preferred Stock, $650,000
to repay the Secured Loan from Level 8 Systems, Inc. and
approximately $300,000 as immediate payments to be made
towards accounts payable and in settlement of employee
termination payments. A further $63,500 will be used to
repay the June 27, 1997 advance from VIE. This will leave a
balance of approximately $836,500 available for working
capital.
Based on the Company's current plan of operations, and
assuming that the Company is successful in securing a sub-
tenant for its space, it is anticipated that the net
proceeds from the intended sale of COPERNICUS pursuant to the
Purchase Agreement and the Company's expected operating
revenues will provide sufficient working capital until
approximately March 1998. The Company's total expenses from
the closing of the transactions contemplated under the
Purchase Agreement for the remainder of the fiscal year
ending March 31,1998 are expected to be below $100,000 per
month. The Company will need additional financing prior to
March 1998 and thereafter if demand for the Company's
products is sufficiently great to require expansion at a
faster rate than anticipated, or if research and development
expenditures or the extent of service and customer support
that the Company is required to provide are greater than
expected or other opportunities arise which require
significant investment, or if revenues are significantly
lower than expected. Additionally, the Company may require
significant additional financing to complete any acquisition.
If financing is required, such financing may be raised
through additional equity offerings, joint ventures or other
collaborative relationships, borrowings and other sources.
There can be no assurance that additional financing will be
available or, if it is available, that it will be available
on acceptable terms. If adequate funds are not available to
satisfy either short or long-term capital requirements, the
Company may be required to limit its operations significantly
and may be unable to carry out its plan of operation. See
Note 1 to the Company's financial statements and "Report of
Independent Certified Public Accountants on Audited Financial
Statements."
New Paradigm intends to seek to raise additional capital by
the issuance of further equity securities. Negotiations are
currently underway with investment bankers to this end.
However, there can be no assurances that any such financing
will be available or, if it is available, that it will be
available on acceptable terms. If additional funds are raised
through the issuance of equity securities, the percentage
ownership of the then current shareholders of the Company
will be reduced and such equity securities may have rights,
preferences or privileges senior to those of the holders of
the Common Stock. Unless the market price of the Company's
Common Stock increases significantly over its market price on
June 27, 1997 additional issuances of equity security could
cause significant dilution to purchasers of Common Stock in
the IPO.
Plan of Operation
During the fiscal year ending March 31, 1998, the Company
intends to continue to develop its Internet business, both by
bringing in new customers for its web-site services business
and by launching new Internet related products. (see
"Internet - other products"). The Internet marketplace,
while expanding rapidly is intensely competitive. Through
March 31, 1997, the Company's NPIL subsidiary had revenues of
$62,420.
None of these products has been completed and feasibility
studies in the likely commercial success of such products
will need to be carried out prior to their launch. The
Company will require additional capital resources to
successfully develop and market these and any other products
and will consequently seek to conclude additional financing
arrangements as soon as possible. Given the uncertainty of
the Company's financial position until the sale of the
COPERNICUS assets has been approved, management considers it
unlikely that any such financing arrangements can be
concluded prior to the Shareholders Meeting.
The Company also intends to seek acquisitions of or other
business combinations with other businesses in related
fields. The Company will have very limited financial
resources to offer to any such prospective partners and
unless there is a significant improvement in the Company's
stock price, will not have attractive stock to offer. The
Company therefore expects to be essentially opportunistic in
seeking business combinations which are available to it.
This means the Company may entertain proposals from
businesses not directly related to its intended area of
operations in order to seek the maximum value for
shareholders. The Company anticipates that any such
combination will require additional financing, and therefore
the attractiveness of any proposed combination to potential
investors will need to be considered.
Item 7. Financial Statements and Supplementary Data
Financial statements are included herein following Part IV,
Item 13.
Item 8. Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers Promoters and
Control Persons; Compliance with Section 16(a) of the
Exchange Act
There are currently three members of the Company's Board of
Directors. The Company's By-Laws authorize the Board of
Directors to fix the number of authorized directors. The By-
Laws also authorize the Board of Directors to fill any
vacancy on the Board of Directors.
The Company has agreed that Mr. Robert S. Trump, an investor
and the purchaser of the Company's Series C Redeemable
Preferred Stock in a private placement in March, 1997 may
nominate for election one person to serve on the Board of
Directors. Mr. Trump has orally advised the Company that he
does not currently intend to nominate anyone to serve on the
Board of Directors.
The following table sets forth the names, ages and positions
with the Company of the Company's directors, executive
officers and key employees:
Name Age Position
- --------------------------- -------- ----------------
Mark Blundell 39 Chief Executive Officer,
President, Chief Financial
Officer, and Director
Matthew Fludgate 25 Secretary, and Vice
President
Daniel A. Gordon 57 Chairman of the Board of
Directors
Michael Taylor 55 Director
Mark Blundell is the Chief Executive Officer, President,
Chief Financial Officer and a director of the Company and has
served in these capacities since the Company's inception.
From October 1991 until December 1993, Mr. Blundell was
initially the Chief Executive Officer of MTI's European
subsidiary and then the Chief Operating Officer and Chief
Financial Officer of MTI in New York. He was also a director
of MTI from December 1993 to March 1994. From May 1988 to
October 1991, Mr. Blundell was the Chief Executive Officer of
London Fox, the futures and options exchange, where he
introduced the first international electronic trading system.
He is also a director and President of Lancer, a company
initially formed to hold the intellectual property rights
relating to the New Paradigm Architecture and which currently
conducts no business. Lancer is a principal shareholder of
the Company. Mr. Blundell received an M.A. in Politics,
Philosophy and Economics from Pembroke College, Oxford.
Matthew Fludgate has been the Secretary and Vice President
of Administration for the Company since May 9, 1997. Prior to
this he was the Business Manager for the Company since
November, 1993. From June 1993 through October 1993 Mr.
Fludgate was an Executive Assistant at Management
Technologies, Inc. Mr. Fludgate received a B.S. in Business
Economics from the State University of New York at Oneonta.
Daniel A. Gordon, an attorney, has been a director and
Chairman of the Board of Directors of the Company since
November 1993. He has been a principal with Corporate Growth
Services since 1992. Corporate Growth Services provides
consulting support services to businesses in the early stages
of development. From 1989 to 1992, Mr. Gordon served as
President of COIN Banking Systems, Inc., which had been the
banking systems division of COIN Financial Systems Inc. Mr.
Gordon had served as Chairman and Chief Executive Officer of
COIN Financial Systems Inc. from 1984 to 1989. He received a
B.A. in English from Dartmouth College and an L.L.B. from
George Washington University.
Michael Taylor has been a director of the Company since
April 26, 1996. Since December 3, 1996 he has been a Senior
Vice President of Gilford Securities. Prior to that he was a
Managing Director of Investment Banking at Laidlaw Equities
from March 1996. He was Associate Director of Investment
Banking for Josephthal Lyon & Ross from June 1989 to March
1996. From early 1980 until joining Josephthal, he was
President of Mostel & Taylor Securities, Inc., a NASD-member
investment banking and brokerage firm. He has been involved
in the securities industry since 1966, when he joined Lehman
Brothers as an analyst. He has been a director of NDE
Environmental, Inc. since July 1992. He is also Chairman of
the Board of Jennifer Muller/The Works, a contemporary dance
company. He attended Amherst College and Columbia University.
In 1991, the Securities and Exchange Commission entered an
administrative order finding that, in 1988 and 1989, Mr.
Taylor aided Mostel & Taylor Securities, Inc. in connection
with certain violations of the net capital requirements for
securities broker-dealers imposed by the Securities Exchange
Act of 1934, and suspended him from associating with a
broker, dealer, investment company, investment adviser or
municipal securities dealer in any capacity for 90 days and
in a proprietary or supervisory capacity for an indefinite
period with the right to apply for removal of such suspension
after two years. He has applied to remove the suspension. Mr.
Taylor consented to the order without admitting or denying
its findings.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934
("Section 16(a)") requires the Company's directors, executive
officers, and persons who own more than 10% of a registered
class of the Company's equity securities, to file with the
Securities and Exchange Commission reports on Forms 3, 4 and
5 concerning their ownership of the Common Stock and other
equity securities of the Company.
Based solely on the Company's review of copies of such
reports and written representations that no other reports
were required, the Company believes that all its officers,
directors and greater than ten percent beneficial owners
complied with all filing requirements applicable to them with
respect to transactions during the fiscal year ended March
31, 1997,
Item 10. Executive Compensation
The following table sets forth information concerning the
compensation of the Company's chief executive officer and
each of the other executive officers (the "Named Officers")
for services rendered in all capacities to the Company. The
Company has only four executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Annual Compensation Long Term Compensation
Name and Principal Position Fiscal Year Salary Bonus Other Securities Restricted All Other
Ended Annual underlying Stock Compensation
March 31, Compensation options Awards
Mark Blundell - Chief Exec- 1995 $150,000 $0 $45,000(1) 0 $0 $1,456(2)
utive Officer, Chief Finan- 1996 $150,000 $20,000 $57,000(1) 38,666 $0 $1,100(2)
cial Officer & President 1997 $150,000 $0 $57,000(1) 149,999 $0 $1,100(2)
John Brann - 1995 $100,000 $0 $0 0 $0 $0
Vice President - Technology(3) 1996 $75,000 $0 $25,000(4) 38,666 $0 $810(2)
1997 $100,000 $0 $0 149,999 $0 $810(2)
Philip V. Caltabiano - 1995 $100,000 $0 $0 0 $188(6) $0
Senior Vice President - 1996 $100,000 $0 $0 33,333 $188(6) $0
Sales and Marketing (5) 1997 $50,000 $0 $75,000(7) 100,000 $188(6) $0
Nicholas Field 1995 $70,000 $0 $0 0 $100(9) $0
Vice President - 1996 $80,000 $0 $0 22,500 $50(9) $0
Implementation (8) 1997 $80,000 $0 $0 66,000 $0(9) $0
Matthew Fludgate 1995 $33,000 $0 $0 0 $0 $0
Secretary and Vice President 1996 $35,000 $5,000 $0 8,667 $0 $0
- - Administration 1997 $42,000 $0 $0 15,000 $0 $0
<FN>
<F1> (1) Reflects a non-accountable expense allowance of $4,000
per month and a car allowance of $750 per month paid to Mr.
Blundell.
<F2> (2) Reflects the insurance premium paid by the Company for
term life insurance for Mr. Blundell and Mr. Brann.
<F3> (3) Resigned effective May 9, 1997.
<F4> (4) Reflects severance pay paid to Mr. Brann when his
employment terminated on March 18, 1996 upon expiration of
his visa to work in the United States. Mr. Brann was
reemployed by the Company upon being granted a new visa on
August 1,1996.
<F5> (5) Resigned effective September 25, 1996.
<F6> (6) Upon first joining the Company in 1993, the Company
awarded Mr. Caltabiano a stock grant of 20,000 shares of
Common Stock, 15,000 of which have vested. The amounts
included in the table reflects 5,000 shares of Common Stock
that vested in each of the fiscal years ended March 31, 1995
and March 31, 1996. These shares were awarded in connection
with the organization of the Company and have been valued at
par value ($.01 per share) before giving effect to a reverse
split of the Company's Common Stock that was approved by the
Company's shareholders on April 18, 1995.
<F7> (7) Reflects payment agreed to be paid in respect of a termination
agreement dated September 27, 1996.
<F8> (8) Resigned effective March 21, 1997.
<F9> (9) Upon first joining the Company in 1993, the Company
awarded Mr. Field a stock grant of 8,000 shares of Common
Stock, all of which have vested. The amount included in this
table reflects 2,667 shares that vested during the year ended
March 31, 1995 and 1,333 shares that vested during the year
ended March 31, 1996. These shares were awarded in connection
with the organization of the Company and have been valued at
par value ($.01 per share) before giving effect to a reverse
split of the Company's Common Stock that was approved by the
Company's shareholders on April 18, 1995.
</FN>
</TABLE>
OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 1997
The following table sets forth all grants of stock options
made during the fiscal year ended March 31, 1997 pursuant to
the Company's Stock Option Plan to the Named Officers:
Individual Grants
<TABLE>
<S> <C> <C> <C> <C>
Name Number of % of Total Average Expiration
Securities Options Granted Exercise or Date
Underlying to Employees in Base Price
Options Fiscal Year Per Share
Granted Ended March 31,
1997 (a)
Mark Blundell 149,999 21% $1.25 November 2000
John Brann (b) 149,999 21% $1.25 November 2000
Philip V. Caltabiano 100,000 14% $1.25 November 2000
Nicholas Field (b) 66,000 9% $1.25 November 2000
Matthew Fludgate 15,000 2% $1.625 November 2000
All Shareholders N/A N/A N/A N/A
All Optionees (a) 715,000 N/A $1.35 November 2000
<FN>
<F1> (a) Includes 30,000 shares of Common Stock issuable upon
exercise of options granted to outside directors.
<F2> (b) Mr Field resigned on March 21, 1997 and Mr. Brann
resigned on May 9, 1997. The terms of the Option Plan
provide that these options will expire 90 days after the date
of resignation unless exercised prior to such date. As at
June 31, 1997 none of these options have been exercised.
</FN>
</TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED MARCH
31, 1997 AND YEAR-END OPTION VALUES
The following table sets forth information with respect to
options exercised by each of the Named Officers during the
fiscal year ended March 31, 1997 and the number and value of
unexercised options as of March 31, 1997:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Shares Value Number of Securities Value of Unexercised in-
Acquired Realized Underlying Unexercised -the-Money Options at
on Exercise Options at March March 31, 1997(a)
Name 31, 1997
Exercisable Unexercisable Exercisable Unexercisable
Mark Blundell 0 $0 38,666 149,999 $0 $0
John Brann 0 0 38,666 149,999 $0 $0
Philip V. Caltabiano 0 0 0 0 $0 $0
Nicholas Field 0 0 22,200 66,000 $0 $0
Matthew Fludgate 0 0 8,667 15,000 $0 $0
<FN>
<F1> (a) Based on the closing price of New Paradigm Software Corp.
Common Stock on March 31, 1997 of $0.50 as reported on NASDAQ
Bulletin Board.
</FN>
</TABLE>
Employment Contracts
The Company has entered into employment contracts with
Messrs. Blundell, Brann and Caltabiano. The employment
contracts of Messrs. Blundell, Brann and Caltabiano contain
the following principal features.
Mr. Blundell: Term: Five years with a remaining term of
approximately two years (1994-1999); Base Salary: $200,000
per annum (Mr. Blundell has waived $50,000 per annum of this
Base Salary (which is not being accrued) until such time as
the Company would otherwise be able to report a pre-tax
annual profit in excess of $75,000); Allowances: Mr.
Blundell receives a non-accountable expense allowance of
$4,000 per month and a car allowance of $750 per month.
Common Stock Award: Mr. Blundell received 26,667 shares of
Common Stock. If the Company achieves at least $2.5 million
in sales in any period of twelve consecutive months, Mr.
Blundell will be paid a bonus of $50,000. Mr. Blundell's
employment contract provides that if such bonus target is
achieved and such bonus paid, he and the Company will
negotiate a new bonus arrangement. Mr. Blundell is entitled
to receive a death benefit of $1,000,000 payable to a
beneficiary named by him. The Company has obtained a life
insurance policy to fund this benefit. Mr. Blundell's
employment agreement will renew automatically from year to
year unless Mr. Blundell or the Company gives notice of
termination to the other on or before May 1 of any year
beginning in 1999. In the event that the Company terminates
the contract other than for cause, or in the event of a
change of control or a sale of substantially all the assets
of the Company, Mr Blundell is entitled to receive a payment
equivalent to two year's benefits under the contract.
Mr. Brann: Term: Three years with a remaining term of
approximately one year(1995-1998); Base Salary: $125,000 per
annum (Mr. Brann has waived $25,000 per annum of this Base
Salary (which is not being accrued) until such time as the
Company would otherwise be able to report a pre-tax annual
profit in excess of $75,000); Common Stock Award: Mr. Brann
received 26,667 shares of Common Stock. Mr. Brann is entitled
to a death benefit of $1,000,000 payable to a beneficiary
named by him. The Company has obtained a life insurance
policy to fund this benefit. Mr. Brann's employment agreement
will renew automatically from year to year unless Mr. Brann
or the Company gives notice of termination to the other on or
before May 1 of any year beginning in 1999. Mr. Brann's
employment as Vice President of Technology was terminated on
March 21, 1996 when his visa to work in the United States
expired. On May 13, 1997 the Company entered into an
agreement with John Brann, the former Secretary and Vice
President of the Company, to terminate his employment with
the Company (the "Termination Agreement") pursuant to an
employment agreement dated June 14, 1993, as amended.
Termination of Mr. Brann's employment is a condition under
the purchase agreement with VIE. As consideration for the
termination under the Termination Agreement the Company
agreed to pay Mr. Brann a total of $50,000 on the earlier of
(i) the closing of the purchase agreement between the Company
and VIE, or (ii) Mr. Brann entering into employment with VIE.
The Company will receive a $30,000 loan from Mr. Brann to be
repaid under the following terms (a) 50% of all royalties due
to the Company under the purchase agreement with VIE up to a
total of $40,000, or (b) full payment of the principal of the
loan at any time including interest at 8% per annum. The
Company has been verbally informed by VIE that it intends to
employ Mr. Brann. The Company has also been informed that Mr.
Brann will be granted certain stock options in VIE in
connection with such employment.
Mr. Caltabiano: Term: Three years (but terminated as set
forth below); Base Salary: $100,000 per annum plus
commissions on sales; Common Stock Award: Mr. Caltabiano
received 20,000 shares of Common Stock, 15,000 of which have
vested.. On September 25, 1996, Mr. Caltabiano left the
Company and the employment agreement was terminated for 5,000
shares of Common Stock, a $50,000 termination fee and a
$25,000 consulting fee.
The directors of the Company currently receive a retainer of
$1,000 per quarter and a fee of $1,000 for each meeting of
the Board of Directors that they attend. They are also
reimbursed by the Company for their direct costs for
attending meetings. On December 8, 1993, Mr. Gordon and three
former directors were each granted, as remuneration for
service on the Board of Directors, an option ("Directors'
Options") to acquire, at a price of $5.00 per unit, 10,000
units, each unit consisting of one share of Common Stock and
one warrant to purchase one share of Common Stock at an
exercise price of $6.00 per share ("1993 Warrant"). These
options will expire on November 1, 1998. On April 26, 1995
Messrs. Blundell, Brann, Gordon and two former directors were
granted options under the Company's Stock Option Plan to
purchase 5,333 shares of Common Stock each at an exercise
price of $4.50 per share. These options became exercisable on
April 26, 1996 and expire on April 26, 2005. On November 30,
1995 Mr. Gordon and two former directors were each granted
options under the Company's Stock Option Plan to purchase
10,000 shares of Common Stock at an exercise price of $5.125
per share. Messrs. Blundell and Brann were granted options
under the Company's Stock Option Plan to purchase 20,000
shares of Common Stock at the same exercise price. These
options become exercisable on November 30, 1996 and expire on
November 30, 2000. On April 24, 1996, Mr. Taylor was granted
options under the Company's Stock Option Plan to purchase
10,000 shares of Common Stock at an exercise price of $5.125
per share. These options become exercisable on April 24, 1997
and expire on April 24, 2001.
Pursuant to an Underwriting Agreement dated August 11, 1995
(the "Underwriting Agreement") between the Company and First
Allied Securities, Inc., as representative (the
"Representative") of the underwriters in the Company's
initial public offering, the Company agreed that until
September 11, 1996 it would not issue any options to any
director or officer of the Company without the prior written
consent of the Representative. The Representative agreed to
the issuance of the options granted in November 1995.
Item 12. Security Ownership of Certain Beneficial
Owners And Management
The following table indicates the beneficial ownership of the
Company's Common Stock as of May 1, 1997, by (1) each of the
directors, (2) each of the executive officers of the Company,
(3) all directors, and executive officers of the Company as a
group and (4) each person or entity which beneficially owned
in excess of five percent of the Common Stock, based upon
information supplied by each of the directors, nominees,
executive officers and five percent beneficial owners:
Common Stock
<TABLE>
<S> <C> <C> <C> <C>
Name of Beneficial Owner(a) Right to Right to Total Number Percent of
Sole Voting Shared Voting of Shares Common Stock
and Investment and Investment Beneficially Beneficially
Power Power Owned Owned
Mark Blundell 220,665(b) 199,999(c) 420,664 16%
John Brann 219,332(d) 199,999(c) 419,331 16%
Matthew Fludgate 25,508(e) 0 25,508 1%
Daniel Gordon 35,333(f) 0 35,333 1%
Lancer Holdings 199,999(g) 0 199,999 8%
Midland Associates 619,999(h) 0 619,999 24%
Michael Taylor 10,000(i) 0 10,000 (j)
Robert Trump 350,000(k) 619,999(l) 969,999 34%
All Directors and
Executive
Officers of the
Company as a
group (a total of
5 persons) 510,838(m) 199,999(n) 710,837 23%
<FN>
<F1> (a) The shares of Common Stock beneficially owned by each
person or by all directors and executive officers as a group,
and the shares included in the total number of shares of
Common Stock outstanding used to determine the percentage of
shares of Common Stock beneficially owned by each person and
such group, have been adjusted in accordance with Rule 13d-3
under the Securities Exchange Act of 1934 to reflect the
ownership of shares issuable upon exercise of outstanding
options, warrants or other common stock equivalents which are
exercisable within 60 days. As provided in such Rule, such
shares issuable to any holder are deemed outstanding for the
purpose of calculating such holder's beneficial ownership but
not any other holder's beneficial ownership.
<F2> (b) Consists of (i) 26,667 shares of Common Stock, (ii) 5,333
shares of Common Stock issuable upon exercise of warrants
issued in a 1994 private placement of the Company's
securities (the "1994 Warrants"), (iii) 38,666 shares of
Common Stock issuable upon exercise of options granted under
the Company's Stock option Plan ("SOP") that are currently
exercisable, and (iv) up to 149,999 shares of Common Stock
underlying stock options be granted under the Executive
Stock Option Plan. .
<F3> (c) Represents the holdings of Lancer Holdings of which Mr.
Blundell and Mr. Brann are each 33% owners and directors and
officers. Consists of 166,666 shares of Common Stock and
33,333 shares of Common Stock issuable upon exercise of
warrants held by Lancer (the "MBA Warrants").
<F4> (d) Consists of (i) 26,667 shares of Common Stock, (ii) 4,000
shares of Common Stock issuable upon exercise of 1994
Warrants, (iii) 38,666 shares of Common Stock issuable upon
exercise of options granted under the SOP that are currently
exercisable and (iv) up to 149,999 shares of Common Stock
underlying stock options granted under the Executive Stock
Option Plan.
<F5> (e) Consists of (i) 534 shares of Common Stock, (ii) 1,307
shares of Common Stock issuable upon exercise of 1994
Warrants and (iii) 23,667 shares of Common Stock issuable
upon the exercise of options granted under the SOP
<F6> (f) Consists of (i) 10,000 shares of Common Stock and 10,000
shares of Common Stock underlying 1993 Warrants issuable upon
exercise of Directors' Options granted in 1993 to non-
employee directors of the Company and (ii) 15,333 shares of
Common Stock issuable upon exercise of options granted under
the SOP that are currently exercisable.
<F7> (g) Consists of 166,666 shares of Common Stock and 33,333
shares of Common Stock issuable upon exercise of the MBA
warrants held by Lancer Holdings.
<F8> (h) Consists of 439,999 shares of Common Stock and 180,000
shares of Common Stock issuable upon exercise of warrants.
These securities were previously owned by Management
Technologies, Inc. ("MTI") and transferred to Midland
Associates in satisfaction of a loan to MTI by Midland
Associates.
<F9> (i) Consists of 10,000 shares of Common Stock issuable upon
exercise of options granted under the SOP.
<F10> (j) Less than 1%.
<F11> (k) Consists of (i) 200,000 shares of Common Stock issuable
upon exercise of 1994 Warrants (ii) 150,000 shares of Common
Stock issuable upon exercise of warrants having an exercise
price of $2.00 per share issued by the Company in connection
with a loan by Mr. Trump that was subsequently canceled as
partial consideration for issuance of the Series C Redeemable
Preferred Stock (the "Trump Warrants").
<F12> (l) Represents the holdings of Midland Associates. Consists
of the securities listed in note h above.
<F13> (m) Consists of all of the securities in notes b-f above.
<F14> (n) Consists of the securities in note g above.
</FN>
</TABLE>
The following table indicates the beneficial ownership of the
Company's Preferred Stock as of May 1, 1997, by (1) each of
the directors, (2) each of the executive officers of the
Company, (3) all directors, and executive officers of the
Company as a group and (4) each person or entity which
beneficially owned in excess of five percent of the Preferred
Stock, based upon information supplied by each of the
directors, nominees, executive officers and five percent
beneficial owners:
Series C Redeemable Preferred Stock (a)
<TABLE>
<S> <C> <C> <C> <C>
Name of Beneficial Owner(a) Right to Right to Total Number Percent of
Sole Voting Shared Voting of Shares Common Stock
and Investment and Investment Beneficially Beneficially
Power Power Owned Owned
Mark Blundell 0 0 0 0%
John Brann 0 0 0 0%
Matthew Fludgate 0 0 0 0%
Daniel Gordon 0 0 0 0%
Lancer Holdings 0 0 0 0%
Midland Associates 0 0 0 0%
Michael Taylor 0 0 0 0%
Robert Trump 800,000 0 800,000 100%
All Directors and
Executive
Officers of the
Company as a
group (a total of
5 persons) 0 0 0 0%
<FN>
<F1> (a) The only preferred stock outstanding as at March 31, 1997
was the Series C Redeemable Preferred Stock. Each Series C
Redeemable Preferred Share has four (4) votes on any matter
to be put to a vote of the Company's shareholders. The
Series C Redeemable Preferred Shares therefore represent 56%
of the votes on any matter to be put to a vote of the
Company's shareholders.
<F2> (b) The shares of Preferred Stock beneficially owned by each
person or by all directors and executive officers as a group,
and the shares included in the total number of shares of
Preferred Stock outstanding used to determine the percentage
of shares of Preferred Stock beneficially owned by each
person and such group, have been adjusted in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934 to
reflect the ownership of shares issuable upon exercise of
outstanding options, warrants or other preferred stock
equivalents which are exercisable within 60 days. As provided
in such Rule, such shares issuable to any holder are deemed
outstanding for the purpose of calculating such holder's
beneficial ownership but not any other holder's beneficial
ownership.
Item 12. Certain Relationships and Related Transactions
General
The following is a discussion of certain transactions entered
into by the Company with officers, directors, security
holders and affiliates thereof. The Company believes that the
terms of these transactions were no less favorable to the
Company than would have been obtained from a non-affiliated
third party for similar transactions at the time of entering
into such transactions.
The Company has adopted a policy whereby any future
transactions, including loans, between the Company and its
directors, officers, principal shareholders and other
affiliates, will be on terms no less favorable to the Company
than could be obtained from unaffiliated third persons on an
arm's-length basis at the time that the transaction was
entered into and will be reviewed and approved by a majority
of the Company's directors, including a majority of the
Company's independent disinterested directors.
Issuance of Securities to Directors, Executive
Officers and Their Affiliates
In a private placement of the Company's securities for which
a closing was held on October 20, 1994 (the "1994
Financing"), Mr. Blundell purchased for $15,000 a fractional
unit comprised of (i) a two-year promissory note with an
increasing interest rate starting at 10% per annum (a "1994
Note") in the principal amount of $15,000 and (ii) 1994
Warrants exercisable for 12,000 shares of Common Stock; Mr.
Brann purchased for $5,000 a fractional unit comprised of (i)
a 1994 Note in the principal amount of $5,000 and (ii) 1994
Warrants exercisable for 4,000 shares of Common Stock; Mr.
Blundell subsequently transferred 1994 Warrants exercisable
for 6,667 shares of Common Stock. The shares of Common Stock
issuable upon exercise of the 1994 Warrants purchased in the
1994 Financing by the foregoing directors and executive
officers are registered for sale under the Securities Act of
1933.
On March 22, 1995, 33,333 shares of Common Stock and warrants
(the "MBA Warrants"), which are exercisable for 33,333 shares
of Common Stock at an exercise price of $5.63 per share,
subject to adjustment under certain circumstances, were
issued to Mark Blundell and Associates (now known as Lancer)
in connection with the Company's acquisition of the New
Paradigm Architecture. See "New Paradigm Architecture." The
MBA Warrants will expire on March 21, 2000 and are not
redeemable.
See "Executive Compensation - Directors Compensation" and
"Options Grants in Fiscal Year Ended March 31, 1997" with
respect to options granted to directors and executive
officers of the Company during the fiscal year ended March
31, 1997.
New Paradigm Architecture
The Company acquired the rights to its proprietary approach
to developing computer programs (the "New Paradigm
Architecture") used to develop its COPERNICUS software and
related intellectual property rights from Lancer as of March
22, 1995 for a consideration equal to 33,333 shares of Common
Stock and the MBA Warrants. Lancer no longer holds any right,
title or interest in COPERNICUS or the New Paradigm
Architecture. Prior to the acquisition of the New Paradigm
Architecture, the Company held an exclusive, perpetual
license to use the New Paradigm Architecture from Lancer. The
Company acquired the license pursuant to a license agreement
with Lancer dated as of July 20, 1993. Pursuant to the July
20, 1993 license agreement, the Company made a one-time
payment of 133,333 shares of Common Stock in 1993 and annual
license fee payments of $10,000 in 1993 and 1994.
The Company's Chief Executive Officer and President, Mark
Blundell, and its former director and Vice President of
Technology, John Brann, collectively own 66% of the voting
stock of Lancer. Messrs. Blundell and Brann have no direct or
indirect interest in the remaining 34% of the voting stock of
Lancer. Messrs. Blundell and Brann are the only directors of
Lancer Holdings and Mr. Blundell is a director of the
Company.
Other Transactions
Mr. Jeff Kahn, a former director, is the President of Kahn
Communications Group Inc.("KCG"), a division of Ruder Finn.
Kahn Communications Group provided public relations services
to the Company from its inception until December 1996 for
which it received a monthly fixed fee from the Company of
$5,000. KCG also provided special event related marketing
services to the Company for which it received additional fees
on a per engagement basis. In the fiscal year ended March 31,
1996, KCG received $88,589 and in the fiscal year ended
March 31, 1997, in such fees. The Company ceased using the
services of KCG in December 1996 following the termination of
the Company's marketing program.
On September 1, 1995 the Company entered into a consulting
contract with Corporate Growth Services, a corporation owned
by Mr. Gordon, Chairman of the Board of Directors. Corporate
Growth Services provides small development stage companies
with management consulting. Under the terms of the contract
Corporate Growth Services receives a consulting fee of $2,000
per month over and above any fees Mr. Gordon receives for
attending meetings of the Board of Directors. In the fiscal
year ended March 31, 1996 Corporate Growth Services received
$18,000 in such fees and in the fiscal year ended March 31,
1997, $24,000..
Effective March 31, 1996, the Company entered into a
five-year value added reseller agreement with Petra, Inc.
("Petra"). Petra's president, Mr. Barrington J Fludgate, is a
consultant to and a former director of the Company. The
Company granted to Petra the right to license and distribute
the Company's COPERNICUS software program integrated with
Petra's products. Petra never paid the license fee of
$100,000 due to the Company on September 30, 1996, and
consequently the Company terminated the agreement.
Loan from Mr. Robert Trump
In early January, 1997, in order to continue operating, the
Company solicited a $150,000 loan from Mr. Robert Trump which
was received on January 16, 1997. The principal terms of
this loan were as follows:
o Advance: $150,000.
o Term: 6 months (to expire July 14th, 1997).
o Interest Rate: To be paid in warrants, see below.
o Warrants: 150,000 three-year warrants with an
exercise price of $2.00 per share, in lieu
of interest.
Other terms: The 180,000 Midland Warrants, held by Midland
Associates, an affiliate of Mr. Trump, were amended as
follows: The expiration date was changed from August 11,
1998 to January 16, 2002 and the exercise price reduced from
$3.75 to $2.00 per share.
Series C Redeemable Preferred Stock
On March 13, 1997, Mr. Robert Trump agreed to advance the
Company a further $50,000 which the Company urgently required
in order to continue its operations and meet its payroll
obligations. The earlier $150,000 advance and the March 13,
1997 $50,000 advance were combined into $200,000 to be used
to subscribe for 800,000 shares of Series C Redeemable
Preferred Stock, $0.01 par value, with the following
principal terms:
o Each Series C Redeemable Preferred Share has four (4) votes
on any matter to be put to a vote of the Company's
shareholders.
o The Series C Redeemable Preferred Stock can be redeemed at
the Company's option at any time upon payment of $200,000.
o The Series C Redeemable Preferred Stock can be redeemed at
the holder's option following any investment in the Company
or a sale of any of the Company's assets where the proceeds
are $2,000,000 or more.
o The Series C Redeemable Preferred Stock will have
preference in the event of any liquidation of the Company
to the extent of $200,000.
The Company therefore intends to redeem the Series C
Redeemable Preferred Stock using $200,000 of the proceeds of
the closing of the transactions contemplated by the Purchase
Agreement. At that time, there were no other sources of
funds actually offered to the Company. Management believes
that these terms were the best it could secure at that time,
and these terms were arrived at through arms-length
negotiations with Mr. Trump. The level of four votes per
share was required by the Mr. Trump in order to give him
significant influence in the approval of any potential sale
of COPERNICUS to ensure that the advance was repaid. The
Series C Preferred Stock represent 56% of the votes on any
matter to be put to a vote of the Company's shareholders, and
increased the proportion of the vote on any such matter
exercisable by Mr. Trump, and Midland Associates, (with which
he is affiliated) from 18% to 64%.
Management believes that the Company was able to secure
improved terms from Level 8 and then from VIE as a result of
this transaction. Neither Mr. Trump nor Midland Associates
is affiliated with either Level 8 or VIE.
PART IV
Item 14. Exhibits, Financial Statements and Reports
on Form 8-K
A Exhibits
3.1
Restated Certificate of Incorporation of the Company, as
amended by a Certificate of Amendment dated August 14, 1995
and as corrected by a Certificate of Corrections dated
August 24, 1995 (incorporated by reference to Exhibit 2 to
Form 10-QSB for the Quarterly Period ended June 30, 1995
"the June 1995 Form 10-QSB"))
3.1.1
Certificate of Designation establishing Series C Redeemable
Preferred Stock
3.2
By-laws of the Company (incorporated by reference to Exhibit
3.2 to Amendment No. 1 to the Registration Statement on Form
SB-2 (File No. 33-92988NY (the "Registration Statement")).
4.1
Form of Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company (incorporated by
reference to Exhibit 4 to the June 1995 Form 10-QSB)
4.2
Form of Representative's Warrant Agreement (incorporated by
reference to Exhibit 4.2 to Amendment No. 1 to the
Registration Statement).
4.3
Form of 1993 Warrant (incorporated by reference to Exhibit
4.3 to Amendment No. 1 to the Registration Statement).
4.4
Letter dated December 8, 1993 from the Company to Barrington
J. Fludgate granting Directors Options to purchase shares of
Common Stock and 1993 Warrants. Substantially identical
grants were made to Anthony J. Cataldo, Daniel A. Gordon and
Jeff Kahn (incorporated by reference to Exhibit 4.4
Amendment to No. 1 to the Registration Statement).
4.5
Form of 1994 Warrant (incorporated by reference to Exhibit
4.5 to Amendment No. 1 to the Registration Statement).
4.6
Form of 1995 Warrant (incorporated by reference to Exhibit
4.6 to Amendment No. 1 to the Registration Statement).
4.7
Form of Lancer Warrant. (incorporated by reference to
Exhibit 4.7 to the Registration Statement).
4.8
Form of Financial Advisory and Investment Banking Agreement
with the Representative (incorporated by reference to
Exhibit 4.8 to Amendment No. 3 to the Registration
Statement).
4.9
Form of Midland Warrant (incorporated by reference to
Exhibit 4.9 to the Registration Statement).
4.10
Form of Agreement between the Company and Josephthal Lyon &
Ross incorporated regarding termination of certain warrants
(incorporated by reference to Exhibit 4.10 to Amendment No.
2 to the Registration Statement).
4.11
Option Agreement dated October 9, 1995 between the Company
and the Electric Magic Company (incorporated herein by
reference to Exhibit 4.11 to Form 10-QSB for the Quarterly
Period ended September 30, 1995 (the "September 1995 Form
10-QSB")).
4.12
Warrant issued to Omotsu Holdings Limited (incorporated by
reference to Exhibit 4.12 to the September 1995 Form 10-
QSB).
10.1.1
Blundell Employment Contract, as amended (incorporated by
reference to Exhibit 10.1.1 to the Registration Statement).
10.1.2
Brann Employment Contract, as amended (incorporated by
reference to Exhibit 10.1.2 to the Registration Statement).
10.1.3
Caltabiano Employment Contract, as amended (incorporated by
reference to Exhibit 10.1.3 to the Registration Statement).
10.2
MBA Rights Purchase Agreement dated March 22, 1995
(incorporated by reference to Exhibit 10.2 to the
Registration Statement).
10.3
Voting Trust Agreement (incorporated by reference to Exhibit
10.3 to Amendment No. 1 to the Registration Statement).
10.4
MTI Settlement Agreement dated as of May 26, 1995
(incorporated by reference to Exhibit 10.4 to the
Registration Statement).
10.5.1
Paxcell, Inc. Distribution Agreement dated March 31, 1994
(incorporated by reference to Exhibit 10.5.1 to the
Registration Statement).
10.5.2
Rivergate Systems, Inc. Distribution Agreement dated June
23, 1994 (incorporated by reference to Exhibit 10.5.2 to the
Registration Statement).
10.5.3
New Venture Technologies Distribution Agreement dated
January 11, 1995 (incorporated by reference to Exhibit
10.5.3 to Amendment No. 1 to the Registration Statement).
10.6.1
Financial Performance Corporation Value-Added Reseller
Agreement dated April 29, 1994 (incorporated by reference to
Exhibit 10.6.1 to the Registration Statement).
10.6.2
Benson Software Systems, Inc. Value-Added Reseller Agreement
dated October 25, 1994 (incorporated by reference to Exhibit
10.6.2 to the Registration Statement).
10.6.3
Praxis Value-Added Reseller Agreement dated January 9, 1995
(incorporated by reference to Exhibit 10.6.3 to the
Registration Statement).
10.7
Novell Inc. Co-Marketing Letter Agreement dated December 2,
1994 (incorporated by reference to Exhibit 10.7 to the
Registration Statement).
10.8
Publicitas Letter Agreement dated January 31, 1995
(incorporated by reference to Exhibit 10.8 to the
Registration Statement).
10.9
Stock Option Plan of the Company (incorporated by reference
to Exhibit 10.9 to the Registration Statement).
10.10
Accounts Receivable Purchase and Sale Agreement between the
Company and MTB Bank (incorporated by reference to Exhibit
10.10 to Amendment No. 1 to the Registration Statement).
10.11
Software License Agreement dated May 31, 1995 between the
Company and Marriott International, Inc. (incorporated by
reference to Exhibit 10.11 to Amendment No. 1 to the
Registration Statement).
10.13
Marriott Acceptance Certificate, dated June 8, 1995
(incorporated by reference to Exhibit 10.13 to Amendment No.
2 to the Registration Statement).
10.14
Agreement dated October 9, 1995 between the Company and
Electric Magic Company (incorporated by reference to Exhibit
10.14 to the September 1995 Form 10-QSB).
10.15
Agreement dated October 31, 1995 between the Company and
Camelot Corporation (incorporated by reference to Exhibit
10.15 to the September 1995 Form 10-QSB).
10.16
Note issued by the Company to Mr. Robert Trump dated January
15, 1997 (incorporated by reference to Form 8-K filed
January 16, 1997).
10.18
Lease dated October 31, 1997 between the Company and
GoAmerica Tours, Inc. (incorporated by reference to Exhibit
10.18 to the December 31, 1996 Form 10-QSB).
10.19
Agreement dated as of April 1, 1997 between the Company and
Custom Information Systems, Inc. (incorporated by reference
to Form 8-K filed May 2, 1997)
10.20
Letter Agreement dated March 19, 1997 between the Company
and Level 8 Systems, Inc.
10.21
Agreements dated as of May 9, 1997 between the Company and
VIE Systems, Inc. (incorporated by reference to Form 8K
filed May 16, 1997)
11 Statement re: computation of per share earnings (losses)
24 Power of Attorney.
99 Financial data schedule
B. Reports on Form 8-K
The following reports have been filed on Form 8-K since
February 15, 1997.
1) March 17, 1997 New Paradigm Software Corp. Reports
Delisting from NASDAQ SmallCap Market
2) March 19, 1997 New Paradigm Software Corp. Reports
Financing - Preferred Stock Issue
3) April 17, 1997 New Paradigm Software Corp. Reports
Sale of EDI Business for $300,000
4) May 9, 1997 Mr. John Brann Resigns as Director and
Corporate Secretary of the Company
5) May 23, 1997 New Paradigm Software Corp. Announces
Sale of COPERNICUS
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NEW PARADIGM SOFTWARE CORP.
(Registrant)
Date: June 30, 1997 _/s/ Mark Blundell________________
Mark Blundell
President & Chief Executive
Officer
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Mark Blundell
Mark Blundell Chief Executive Officer and
President (principal executive
officer, principal financial
officer and principal
accounting officer) and Director June 30, 1997
/s/Daniel A. Gordon
Daniel A. Gordon
By Arthur M. Mitchell
Attorney in fact Chairman of the Board of Directors June 30, 1997
/s/ Michael Taylor
Michael Taylor Director June 30, 1997
<PAGE>
AUDITED FINANCIAL STATEMENTS
NEW PARADIGM SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
Report of independent certified public accountants F-2
Consolidated financial statements:
Balance sheet F-3
Statements of operations F-4
Statements of shareholders' equity (capital deficit) F-5 - F-6
Statements of cash flows F-7
Notes to consolidated financial statements F-8 - F-20
Report of Independent Certified Public Accountants
New Paradigm Software Corp.
and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheet
of New Paradigm Software Corp. and Subsidiaries as of
March 31, 1997, and the related consolidated statements of
operations, shareholders' equity (capital deficit), and cash
flows for the two years in the period ended March 31, 1997. These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of New Paradigm Software Corp. and
Subsidiaries at March 31, 1997, and the results of their
operations and their cash flows for the two years in the perios ended
March 31, 1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As disclosed in Note 1, the Company has incurred
significant losses since its inception and as discussed in
Note 14, the Company has entered into agreements to dispose
of its COPERNICUS and EDI businesses. At March 31, 1997 the
Company had deficiencies in working capital and equity.
These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 1. These consolidated
financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
BDO Seidman, LLP
New York, New York
June 25, 1997
NEW PARADIGM SOFTWARE CORP. and SUBSIDIARIES
Consolidated Balance Sheet
</TABLE>
<TABLE>
<S> <C>
March 31, 1997
Assets
Current:
Cash and cash equivalents $328,168
Accounts receivable 50,612
Other receivables and prepayments 32,487
________
Total current assets 411,267
Property and equipment, less accumulated depreciation and
amortization (Note 3) 168,920
Investment in restricted common stock at market value
(Note 10) 14,759
Assets held for sale (Note 14) 691,491
Other assets, less accumulated amortization (Note 4) 71,266
------------
$1,357,703
Liabilities and Capital Deficit
Current:
Loan payable (Note 5) $550,000
Accounts payable and accrued expenses 806,690
Deferred rent payable (Note 7a) 71,127
------------
Total current liabilities 1,427,817
Redeemable Series C shares authorized and outstanding
800,000 200,000
___________
Commitments and contingencies (Note 7)
Capital deficit (Notes 2,8 and 10):
Preferred stock, $.01 par value - shares authorized
10,000,000:
Series A shares authorized, 1,000,000; none issued and
outstanding -
Series B shares authorized 2,000,000; none issued and
outstanding -
Common stock, $.01 par value - shares authorized
50,000,000; issued and outstanding 2,451,729 24,517
Additional paid-in capital 9,150,209
Unrealized loss on investment in restricted common
stock (335,241)
Deficit (9,109,599)
------------
Total Capital deficit (270,114)
------------
$1,357,703
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
NEW PARADIGM SOFTWARE CORP. and SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<S> <C> <C>
Year ended Year ended
March 31, 1997 March 31, 1996
Revenues:
Consulting $ 69,976 $ -
_________ __________
69,976 -
Expenses:
Employee costs 630,616 520,356
General and administrative (Note 12a) 340,744 215,199
Professional fees 244,731 256,148
Marketing (Note 12b) 164,238 88,461
Occupancy 197,230 198,365
Depreciation and amortization 49,604 37,803
_________ __________
1,627,163 1,316,332
_________ __________
Loss from operations (1,562,187) (1,316,332)
Other income (expense):
Interest income 25,099 112,251
Gain on sale of assets (Note 10) - 24,865
Interest expense - (63,724)
Amortization of debt discount and
deferred financing costs - (375,546)
_________ __________
25,099 (302,154)
Loss from continuing operations (1,537,088) (1,618,486)
Loss from discontinued operations (Note 14) (1,438,319) (1,941,806)
_________ __________
Net Loss $(2,975,407) $(3,560,292)
_________ __________
Loss per Common share from continuing
operations $(0.63) $(0.93)
Loss per Common share from discontinued
operations (0.58) (1.11)
Loss per Common share ($1.21) ($2.04)
_________ __________
Weighted average common shares
outstanding 2,449,428 1,743,472
</TABLE>
See accompanying notes to consolidated financial statements
NEW PARADIGM SOFTWARE CORP. and SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Capital Deficit)
Years ended March 31, 1997 and 1996 (Note 8)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred stock Additional Unrealized Total
Series A, B and C Common Stock Paid in Capital on investment Deficit Shareholders'
in restricted equity (capital
Shares Par Value Shares Par Value stock deficit)
- --------------------------------------------------------------------------------------------------------------------
Balance, April 1, 1995 1,240,500 $12,405 693,323 $6,933 $1,353,650 $ - $(2,573,900) $(1,200,912)
Issuance of Series B
preferred stock
and warrants in
private placement, net
of costs of $11,000,
April 1995 100,000 1,000 - - 12,400 - - 13,400
Conversion of MTI
debt to paid-in
capital, May 1995 - - - - 491,284 - - 491,284
Vesting of 1,333
shares issued to
an employee pursuant
to a restricted
grant, June 1995 - - 1,333 13 37 - - 50
Exercise of 1993
warrants at an
exercise price of
$.49 per share pursuant
to a special exercise
offer, July 1995 - - 29,250 293 14,040 - - 14,333
Conversion of Series A
preferred stock to
common, August 1995
(Note 8 (a)) (28,000) (280) 28,000 280 - - - -
Conversion of Series B
preferred stock to
common, August 1995
(Note 8(a)) (1,312,500) (13,125) 201,916 2,019 11,106 - - -
Sale of common
stock and warrants
in the Company's
initial public
offering, August
1995, @ $6.50 per
share, net of
underwriters' discount,
underwriters' expense
allowance and other
expenses of the offering
(Note 2) - - 1,200,000 12,000 5,813,703 - - 5,825,703
Issuance of common stock
upon exercise of the
underwriters' overallotment
option, September 1995,
net of underwriters'
discount and expenses
(Note 2) - - 180,000 1,800 1,064,430 - - 1,066,230
Issuance of common stock
for the purchase of Netphone,
November 1995 @ $3.00 per
share (Note 10) - - 80,000 800 239,200 - - 240,000
Issuance of options for the
purchase of Netphone,
November 1995 (Note 10) - - - - 500 - - 500
Issuance of common stock for
settlement of legal fees @
$5.38 per share, December
1995 (Note 8(d)) - - 27,907 279 149,721 - - 150,000
Vesting of 5,000 shares
issued to an employee pursuant
to a restricted grant,
December 1995 - - 5,000 50 138 - - 188
Unrealized loss on
investment in restricted
stock(Note 10) - - - - - (164,457) - (164,457)
Net loss for the year - - - - - - (3,560,292) (3,560,292)
- -----------------------------------------------------------------------------------------------------------------
Balance,March 31, 1996 - - 2,446,729 $24,467 $9,150,209 $(164,457) $(6,134,192) $2,876,027
See accompanying notes to consolidated financial statement
</TABLE>
See accompanying notes to consolidated financial statements
NEW PARADIGM SOFTWARE CORP. and SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Capital Deficit)
Years ended March 31, 1997 and 1996 (Note 8)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred stock Additional Unrealized Total
Series A, B and C Common Stock Paid in Capital on investment Deficit Shareholders'
in restricted equity (capital
Shares Par Value Shares Par Value stock deficit)
- --------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 - $ - 2,446,729 $24,467 $9,150,209 $(164,457) $(6,134,192) $2,876,027
Issuance of Series C
redeemable preferred
stock in March 1997
(Note 8a) 800,000 8,000 - - 192,000 - - 200,000
Reclassification of
Series C Redeemable
Preferred Stock (800,000) (8,000) - - (192,000) - - (200,000)
Issuance of Common
Stock to terminated
employee - - 5,000 50 - - - 50
Unrealized loss on
investment in restricted
stock (Note 10) - - - - - (170,784) - -
Net loss for the year - - - - - - (2,975,407) (2,975,407)
- --------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1997 - $ - 2,451,729 $24,517 $9,150,209 $(335,241) $(9,109,599) $(270,114)
</TABLE>
See accompanying notes to consolidated financial statements
NEW PARADIGM SOFTWARE CORP. and SUBSIDIARIES
Consolidated Statements of Cash Flows (Note 9)
<TABLE>
<S> <C> <C>
Year ended Year ended
March 31, 1997 March 31, 1996
Cash flows from operating activities:
Net Loss $(2,975,407) $(3,560,292)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 230,880 134,138
Gain on sale of assets - (24,482)
Deferred rent expense 71,127 -
Issuance of Common Stock to
terminated employee 50 -
Issuance of common stock to employees
pursuant to a restricted grant - 238
Amortization of debt discount and
deferred financing costs - 375,546
Noncash interest expense - 3,110
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (22,116) (78,544)
Receivable from related party 50,000 (50,000)
Other receivables and prepayments 76,073 (108,560)
Other assets (61,281) (5,950)
Increase (decrease) in:
Accounts payable and accrued
expenses 589,748 (144,337)
Deferred revenue 27,500 17,500
------- -------
Total adjustments 961,981 118,659
Net cash used in operating
activities 2,013,426 (3,441,633)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (57,747) (324,940)
COPERNICUS development costs (276,746) (218,950)
Sale of property and equipment - 3,300
Purchase of Netphone software - (280,000)
Sale of Netphone software - 193,532
Patents, trademarks and organization
costs (91,385) (5,985)
------- -------
Net cash used in investing activities: (425,878) (633,043)
------- -------
Cash flows from financing activities:
Proceeds from sale of Redeemable Preferred
Class C stock 200,000 -
Proceeds from note payable 550,000 -
Proceeds from private placements - 100,000
Borrowings from shareholder - 107,283
Repayment of debt - (1,632,500)
Proceeds from bank loan - 100,000
Repayment of bank loan - (100,000)
Repayment of shareholder loans - (175,234)
Proceeds from exercise of 1993 warrants - 14,333
Proceeds from Initial Public Offering of common
stock and warrants - 7,283,973
------- -------
Net cash provided by financing activities 750,000 5,697,855
------- -------
Net increase (decrease) in cash and cash
equivalents (1,689,304) 1,623,179
Cash and cash equivalents, beginning of period 2,017,472 394,293
Cash and cash equivalents, end of period $328,168 $2,017,472
</TABLE>
See accompanying notes to consolidated financial statements
1. Organization and Summary of Accounting Policies
Organization
New Paradigm Software Corp. (the "Company")
a New York corporation, was founded in July
1993 and commenced operations on
November 1, 1993. The Company is engaged in
the research, development and marketing of
computer software based upon a software
architecture acquired from Lancer Holdings,
Inc. ("Lancer"), a related party (see
Note 7(c)).
In December 1995, the Company incorporated
two wholly-owned subsidiaries, New Paradigm
Commerce (formerly known as New Paradigm
Golden-Link, Inc.) (See Note 14),consisting
of its former electronic data interchange
("EDI") division, and New Paradigm
Inter-Link, Inc. ("NPIL") a subsidiary
created to research and develop commercial
applications for the Internet.
The Company had no significant revenues
through March 31, 1997 and its activities
had been limited to finalization of domestic
and foreign patent agreements,
organizational and initial capitalization
activities, research and development of
computer software products, initial
marketing activities and pilot projects.
Basis of Presentation
The accompanying consolidated financial
statements have been prepared on the basis that
the Company will continue as a going concern,
which contemplates the realization of assets
and the satisfaction of liabilities in the
normal course of business. At March 31,
1997 the Company had a deficit in working
capital approximating $1,017,000, a capital
deficit of approximately $270,000 and had incurred
significant losses since inception. As
discussed in Note 14, the Company has
entered into agreements to dispose of its
COPERNICUS and EDI businesses. General and
administrative expenses, employee costs,
professional fees and occupancy expenses
from continuing operations will be incurred which, in the
absence of significant income from new operations, will
produce continuing net losses and an increase in
capital deficit annually. Although there
can be no assurance of its success,
management intends to continue to develop
its Internet business (through its
subsidiary NPIL) and also intends to seek
acquisitions of or other business
combinations with other businesses in
related fields. The consolidated financial
statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and its
wholly-owned subsidiaries. All material
intercompany accounts and transactions are
eliminated.
Cash Equivalents
Cash equivalents are comprised of highly
liquid debt instruments with original
maturities of three months or less,
principally money market accounts.
Investment in Equity Securities
Investment in restricted common stock is
accounted for in accordance with Statement
of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt
and Equity Securities". Under Statement No.
115, debt and marketable equity securities
are required to be classified in one of
three categories: trading, available-for-
sale or held to maturity. The Company's
investment in restricted common stock
qualifies under the provisions of Statement
No. 115 as available-for-sale. Such
securities are recorded at fair value, and
unrealized holding gains and losses, net of
the related tax effect, are not reflected in
earnings but are reported as a separate
component of shareholders' equity until
realized.
Property, Equipment and Depreciation
Property and equipment are stated at cost.
Depreciation is computed using accelerated
methods over the estimated useful lives of
the assets, ranging from 5-7 years for
financial and tax reporting purposes.
Intangible Assets
Patents and related trademarks are amortized
using the straight-line method over 17
years, which is the estimated useful life of
the patents.
Software rights are amortized using the
straight-line method over 5 years.
Copernicus development costs are amortized
using the straight-line method over 5 years
(see Product Development).
Organization costs are amortized using the
straight-line method over 5 years.
Revenue Recognition
Revenue from software products is recognized
upon delivery to the customer. The Company's
contracts with its customers provide for
payment to be made on specified schedules
which may differ from the timing of
recognition of revenue. Customer advances
are recorded as cash payments received in
advance of delivery.
Maintenance fees are recognized
proportionately over the term of the
maintenance agreement. Customer service fees
represent fees charged to customers for
installation, configuration and modification
of standard software to customer
specifications. Revenue is recorded as work
is performed under the relevant arrangement.
Use of Estimates
The preparation of the financial statements
in conformity with generally accepted
accounting principles requires management to
make estimates and assumptions that affect
the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash, and cash equivalents accounts
receivable, other receivables, loans accounts payable and
redeemable preferred stock approximate fair value because
of the short maturity of these items.
Stock-Based Compensation
In October 1995, the Financial Accounting
Standards Board issued Statement of
Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 123 requires
entities which have arrangements under which
employees receive shares of stock or other
equity instruments of the employer or the
employer incurs liabilities to employees in
amounts based upon the price of its stock to
either record the fair value of the
arrangements or disclose the pro forma
effects of the fair value of the
arrangements. During fiscal year ended
March 31, 1997, the Company has adopted the
disclosure method of SFAS No. 123. The
adoption of this method did not affect the
Company's financial position, operating
results or cash flows.
Product Development
Costs associated with product development
subsequent to establishment of technological
feasibility, including enhancements to
software products, are capitalized and
amortized as required by Statement of
Financial Accounting Standards No. 86,
"Accounting for the Cost of Computer
Software to Be Sold, Leased, or Otherwise
Marketed" ("SFAS No. 86"). Costs incurred
prior to achieving technological feasibility
are expensed as incurred. On July 1, 1995,
the Company established technological
feasibility for its COPERNICUS software
product and capitalized all enhancement and
upgrade costs since that date as provided by
SFAS No. 86.
Income Taxes
Income taxes are computed in accordance with
the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"), which
requires, among other things, a liability
approach to calculating deferred income
taxes. SFAS No. 109 requires a company to
recognize deferred tax liabilities and
assets for the expected future tax
consequences of temporary differences
between the carrying amounts of assets and
liabilities for financial reporting purposes
and the amounts used for income tax
purposes. Deferred tax assets must be
reduced by a valuation allowance to amounts
expected to be realized.
Net Loss Per Share
Net loss per share is based on the weighted
average number of common shares outstanding
and dilutive common stock equivalents during
the periods. For the year ended March 31,
1996 and 1997, common stock options and
warrants outstanding are not included in the
calculation of weighted average number of
common shares outstanding as their effect is
antidilutive.
A portion of the proceeds from the Company's
initial public offering ("IPO") of common
stock and redeemable warrants was used to
repay long-term debt. If such debt had been
repaid at the beginning of the fiscal year
ended March 31, 1996, with a portion of such
proceeds, the Company's loss per share would
have been $(1.76).
Recent Accounting Standards
1n 1997, the Financial Accounting Standards
Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per
Share" ("SFAS No. 128"). SFAS No. 128
specifies the computation, presentation, and
disclosure requirements for earnings per
share. SFAS No. 128 is effective for
periods ending after December 15, 1997. The
adoption of this statement is not expected
to have a material effect on the
consolidated financial statements.
2. Initial Public Offering
The registration statement for the Company's
IPO became effective on August 11, 1995. The
Company consummated the IPO on August 16,
1995 and issued 1,200,000 shares of common
stock and 1,200,000 redeemable warrants
("Redeemable Warrants"), each entitling the
holder to purchase one share of common stock
at an initial exercise price of $7.80 per
share. In September 1995, the underwriters
in the IPO exercised the overallotment
option granted to them by the Company and
purchased 180,000 additional shares of
common stock and 180,000 Redeemable Warrants
upon the same terms and conditions as listed
above. The Company raised proceeds of
$6,891,933, net of underwriters' discount,
underwriters' expense allowance and other
expenses of the IPO.
Each Redeemable Warrant entitles the holder
to purchase one share of common stock
(subsequently adjusted to 1.029 common
shares per Redeemable Warrant) at an
exercise price of $7.80 per Redeemable
Warrant (subsequently adjusted to $7.58 per
Redeemable Warrant) during a four-year
exercise period commencing on August 11,
1996, one year after the anniversary of the
IPO. The Redeemable Warrants may be redeemed
by the Company upon 30 days' prior written
notice, at a price of $.10 per warrant,
provided that the average closing bid
quotation of the common stock as reported on
the over-the-counter market or the closing
sale price, if listed on a national
securities exchange, during a period of 20
consecutive trading days ending within 10
days prior to the date of such notice shall
be not less than $9.75, subject to
adjustment in certain circumstances
(subsequently adjusted to $9.48). The
Company also issued to the representative of
the underwriters warrants to purchase
120,000 shares of common stock (subsequently
adjusted to 123,480 common shares) at an
exercise price of $7.80 per share
(subsequently adjusted to $7.58 per share)
and 120,000 Redeemable Warrants at an
exercise price of $.12 per Redeemable
Warrant.
3. Property and Equipment
Property and equipment consists of the following:
March 31, 1997
Computer equipment $ 225,396
Software 21,804
Furniture and fixtures 79,343
Telephone system 37,262
-------
363,805
Less: Accumulated depreciation and
amortization
194,885
-------
$168,920
4. Other Assets
Other assets are summarized as follows:
March 31, 1997
Trademarks 3,792
Organization costs 4,487
Security deposits 67,631
-------
75,910
Less: Accumulated
amortization 4,644
-------
71,266
5. Loan Payable
On March 20, 1997 a corporation Level 8
Systems, Inc., interested in purchasing the
COPERNICUS assets made a formal offer to the
Company to purchase COPERNICUS. In
connection with this offer, Level 8 Systems,
Inc. advanced the Company a loan for
$550,000. This loan matures on July 17,
1997, bears interest at 10% per annum and is
collateralized by the COPERNICUS product and
related assets. This offer stated that the
Company was free to negotiate with other
potential buyers of the COPERNICUS assets;
however, if the Company was to sell
COPERNICUS on or before the repayment of the
loan a break-up fee of $100,000 would be
payable to Level 8 Systems, Inc.. The
proposed sale of COPERNICUS to VIE discussed
in note 14 would represent such a sale and
the break-up fee would be paid if such sale
is approved by the shareholders.
6.
Income Taxes
The Company's net operating loss
carryforwards and deferred tax asset account
are approximately as follows:
<TABLE>
<S> <C> <C> <C>
Period or Year Net operating Net Deferred
ended March 31, Year of expiration loss carryforward tax asset
- ---------------------------------------------------------------------------
1994 2009 $589,000 $ -
1995 2010 1,954,000 -
1996 2011 3,542,000 -
1997 2012 2,958,000 -
---------
9,043,000 $ -
</TABLE>
The tax benefit of these losses
(approximately $4,140,000 at March 31, 1997) is
subject to significant limitations due to
the change in control for income tax
purposes resulting from the Company's IPO in
August 1995. The tax benefit of these losses
has been fully reserved by a valuation
allowance of the same amount due to the
uncertainty of its realization.
7. Commitments and Contingencies
(a) Leases
The Company was leasing its New York
sales and office space on a monthly basis
from Management Technologies, Inc.
("MTI"). Effective September 1, 1995, the
arrangement with MTI was terminated and
the Company leased this space on a month-
to-month basis through December 1996 when
the Company moved to a new location. The
Company's Atlanta sales office was leased
on a month-to-month basis through January
1997, when this sales office was closed.
The Company currently subleases sales and
office space from sublessors who have
entered into non-cancelable operating
lease obligations with the landlord. The
Company and the sublessors intend for the
Company to occupy the space for the
entire term of the lease agreement from
December 1, 1996 through August 31, 1999.
The lease agreement provides for
scheduled rent increases during the lease
term and for rental payments commencing
three months after the initial occupancy.
When significant, provision has been made
for the excess of average operating lease
rentals, computed on a straight-line
basis over the lease term, over cash
rentals. The deferred rent payable
balance of $71,127 at March 31, 1997
reflects such a provision.
The future minimum rental payments under
this sublease agreement are approximately
as follows:
Year ending March 31,
1998 $275,000
1999 291,000
2000 128,000
-------
$694,000
Rent expense for the years ended
March 31, 1997 and 1996 amounted to
approximately $195,000, and $202,000
respectively.
(b) Employment Agreements
The Company entered into employment
agreements with two of its executive
officers, including Mark Blundell, its
chief executive officer and John Brann, a
former director and Vice-President of
Technology. The agreements provide for
aggregate annual salaries of $325,000
through 1999 plus bonuses based on net
earnings of the Company. The executives
agreed to waive an aggregate of $75,000
of their annual base salaries (which is
not being accrued) until such time as the
Company is able to report a pre-tax
annual profit in excess of $75,000. In
connection with the employment
agreements, the Company issued certain
common stock and other options to the
officers). In addition, the Company has
agreed to pay death benefits aggregating
$2,000,000 to the beneficiaries of the
two officers. The Company has obtained
life insurance policies to fund these
death benefits. Further, the Company has
obtained "key man" insurance policies for
which it is the beneficiary aggregating
$2,500,000.
On May 13, 1997, the Company entered into
an agreement with John Brann, the former
Secretary/Treasurer and Vice President of
the Company, to terminate his employment
agreement with the Company (the
"Termination Agreement") pursuant to an
employment agreement dated June 14, 1993,
as amended. Termination of Mr. Brann's
employment is a condition under the
purchase agreement with VIE Systems, Inc.
("VIE") (see note 14). As consideration
for the termination under the Termination
Agreement the Company agreed to pay Mr.
Brann a total of $50,000 on the earlier
of (i) the closing of the purchase
agreement between the Company and VIE, or
(ii) Mr. Brann entering into employment
with VIE.
The Company has been verbally informed by
VIE that it intends to employ Mr. Brann.
The Company has also been informed that
Mr. Brann will be granted certain stock
options in VIE in connection with such
employment.
The Company had entered into an
employment agreement with another officer
to serve as Senior Vice President of
Sales and Marketing. The agreement
provided for a minimum annual
compensation of $100,000, plus
commissions through 1997. On September
25, 1996, this officer left the Company
and the employment agreement was
terminated for 5,000 shares of Common
Stock, a $50,000 termination fee and a
$25,000 consulting fee. As of March 31,
1997, $58,000 remained unpaid under the
terms of the termination agreement and
has been included in accounts payable and
accrued expenses.
The Company had entered into an
employment agreement with another
officer. The agreement provided for a
minimum annual compensation of $100,000,
plus commission through 1997. On March
21, 1997 this officer resigned his
position with the Company and this
employment agreement was terminated.
The Company had entered into an
employment agreement with an officer to
serve as president of a division of the
Company. The agreement provided for a
minimum annual compensation of $85,000
through 1999 and incentive compensation
dependent on achievement of gross revenue
levels for the division. Subsequent to
March 31, 1996, this officer left the
Company and the employment agreement was
terminated and a termination fee of
$50,000 was paid to this officer.
(c) License Agreement
In August 1993, the Company entered into
a licensing agreement with Lancer
Holdings, Inc. ("Lancer") (formerly known
as Mark Blundell & Associates), of which
Mark Blundell, the President and Chief
Executive Officer and a director, and
John Brann, a consultant and former
director and executive officer of the
Company are controlling shareholders. On
October 27, 1993, 133,333 shares of
common stock were issued to Lancer and
valued at Lancer's basis (nominal value)
and recorded at the par value of the
shares issued (500,000 common shares,
pre-split, at $0.01 per share). Lancer
was the owner of certain intellectual
property rights including rights relating
to certain computer software and
documentation (the "Lancer rights"). The
agreement granted the Company the
exclusive worldwide license to sublicense
the COPERNICUS software in return for
royalty payments to the licensor.
In March 1995, the Company acquired the
Lancer rights for 33,333 shares of common
stock and 33,333 noncallable,
transferable warrants to purchase shares
of common stock, subject to adjustment
under certain circumstances. The common
stock was valued at Lancer's basis
(nominal value) and recorded at the par
value of the shares issued (125,000
common shares pre-split, at $0.01 per
share). Such warrants will expire five
years after their issue date. These
warrants include a cashless exercise
provision which allows Lancer to
surrender warrants in payment for the
exercise thereof.
8. Capital Deficit
(a) Preferred Stock
The Company's Certificate of
Incorporation authorizes issuance of
10,000,000 shares of preferred stock. In
September 1994, the Board of Directors
subdivided the preferred stock to create
a Series A preferred stock with 1,000,000
shares authorized. On October 24, 1994,
105,000 shares of Series A convertible
preferred stock ("A Preferred"), each
convertible into one share of
common stock, were issued in connection
with the October 1994 private placement).
On April 18, 1995, the common
shareholders and the A Preferred
shareholders approved a 1-for-3.75
reverse stock split of the common stock
and the A Preferred. As a result of this
reverse stock split, the outstanding
shares of A Preferred were reduced to
28,000. Upon completion of the IPO, these
shares of A Preferred were converted into
shares of common stock on a one-for-one
basis and all of the shares of A
Preferred were retired and restored to
the status of authorized but unissued
shares of Preferred Stock.
In February 1995, the Board of Directors
subdivided the preferred stock to create
a Series B preferred stock with 2,000,000
shares authorized. On March 23, 1995,
1,212,500 shares of Series B preferred
stock ("B Preferred "), par value $.01
per share, were issued). On April 13,
1995, an additional 100,000 shares of
Series B Preferred were issued. The
shares of B Preferred were convertible
into a number of shares of common stock
equal to the number of shares of B
Preferred to be converted multiplied by
$1.00 divided by the price at which
common stock is sold by the Company in an
IPO. Upon completion of the IPO, these
shares of B Preferred were converted into
shares of common stock on a 1-for-3.75
basis and all of the shares of B
Preferred were retired and restored to
the status of authorized but unissued
shares of preferred stock.
In March 1997 the Board of Directors
subdivided the preferred stock to create
a Series C redeemable preferred stock ("C
Preferred"), $0.01 par value, with
800,000 shares authorized with the
following principal terms:
o Each C Preferred share has four votes
on any matter to be put to the vote of
the Company's Shareholders.
o The C Preferred shares can be redeemed
at the Company's option at any time
upon payment of $200,000.
o The C Preferred shares can be redeemed
at the holder's option following any
investment in the Company or a sale of
any of the Company's assets where the
proceeds are $2,000,000 or more.
o The C Preferred shares will have
preference in the event of any
liquidation to the extent of $200,000
On January a shareholder loaned the
Company $150,000 in exchange for a six-
month non interest bearing note. In
consideration for the note and interest
thereon the shareholder was to be paid
150,000 three-year warrants with an
exercise price of $2.00 per share and a
change in the Midland Warrants (see (b)
below). The 180,000 Midland warrants,
held by Midland Associates, an affiliate
of the shareholder were amended as
follows: the expiration date was changed
from August 11 1988 to January 16, 2002
and the exercise price reduced from $3.75
to $2.00 per share.
On March 15 1997, this shareholder
advanced the Company an additional
$50,000 and surrendered the $150,000 note
which he held. The combined $200,000 was
used to subscribe for the 800,000 C
Preferred shares described above.
(b) Warrants
At March 31, 1997, the Company has
outstanding warrants as follows:
<TABLE>
<S> <C> <C> <C>
Number of Exercise Price Expiration Date
common shares per share
issuable
March 31, 1997
--------------------------------------------------
October 1994 private
placement 310,668 $3.75 October 1999
March 1995 private placement 149,720 $7.58 August 11, 2000(i)
March 1995 software rights
acquisition 33,333 $5.63 March 2000
April 1995 private placement 12,348 $7.58 August 11, 2000(i)
May 1995 settlement
agreement with MTI ("Midland
Warrants") 180,000 $2.00 January 16, 2002(ii)
August 1995 initial public
offering Redeemable Warrants 1,234,000 $7.58 August 11, 2000
August 1995 representative
warrants 123,480 $7.58 August 11, 2000
August 1995 Redeemable
Warrants issuable upon
exercise of representative's
warrants 123,480 $7.58 August 11, 2000(iii)
September 1995 exercise of
underwriters' overallotment
option for Redeemable
Warrants 185,220 $7.58 August 11, 2000
October 1995 Electric Magic
Options 50,000 $6.00 October 9, 1998
October 1995 Omotsu Warrants 80,000 $7.80 August 11, 2000
January 1997 Shareholder
warrants 150,000 $2.00 January 16, 2002
(i) Effective upon completion of the
IPO, these warrants were exchanged by
the holders for Redeemable Warrants
exercisable for an equal number of
shares and the warrants will expire upon
the fifth anniversary of the IPO.
(ii) On January 16, 1997, in connection
with a loan to the Company by the holder
of these warrants, the expiration date
was extended to January 16, 2002 and the
exercise price was reduced to $2.00 per
share.
(iii) The representative's warrants
require payment of an exercise price of
$.12 per Redeemable Warrant issuable
upon exercise of the representative's
warrants.
(c) Common Stock
On incorporation (July 1993), the
Company granted employees rights to
stock at par value that would vest based
on future employment. The total number
of shares offered under such agreements
was 87,762, of which 64,201 were issued
during the period ended March 31, 1994,
12,228 were issued during the year ended
March 31, 1995, 6,333 were issued during
the year ended March 31, 1996 and 5,000
remain to be issued as of March 31,
1997.
On April 18, 1995, the shareholders of
the Company approved a 1-for-3.75
reverse stock split of the common stock.
This reverse stock split has been
retroactively reflected in the
accompanying consolidated financial
statements as of inception.
(d) Issuance of Common Stock for Legal Fees
On November 21, 1995, the Company
entered into an agreement with its
corporate counsel, Chadbourne & Parke
LLP ("C&P"), to settle its then
outstanding legal fees. The Company
settled $450,000 of the outstanding
balance to C&P by payment to C&P of
$300,000 in cash and 27,907 shares of
common stock valued at $150,000.
(e) Stock Option Plan
The Company adopted a stock option plan
(the "Option Plan"), effective April 8,
1994, which was approved by the
shareholders on September 3, 1994. The
Option Plan provides for the grant of
options to qualified employees
(including officers and directors) of
the Company to purchase up to an
aggregate of 266,667 shares of common
stock. The Option Plan is administered
by a committee (the "Committee")
appointed by the Board of Directors. The
Committee may, from time to time, grant
options under the Option Plan to such
key employees as the Committee may
determine, provided, however, that the
Committee may not grant incentive stock
options ("Incentive Options") to any key
employee who is not in the regular
full-time employment of the Company.
Options granted under the Option Plan
may or may not be "incentive stock
options" as defined in the Internal
Revenue Code, depending upon the terms
established by the Committee at the time
of grant. The exercise price shall not
be less than the fair market value of
the Company's common stock as of the
date of the grant (110% of the fair
market value if the grant is an
Incentive Option to an employee who owns
more than 10% of the total combined
voting power of all classes of stock of
the Company). Options granted under the
Option Plan are subject to a maximum
term of 10 years.
In April 1995, options to purchase
99,466 shares of common stock at an
exercise price of $4.50 per share were
granted and became exercisable in April
1996.
In November 1995, options to purchase
124,400 shares of common stock at an
exercise price of $5.125 per share were
granted. Such options vested and became
exercisable on November 30, 1996.
SFAS No. 123 requires the Company to
provide pro forma information regarding
net loss and loss per share as if
compensation cost for the Company's
stock option plans had been determined
in accordance with the fair value based
method prescribed in SFAS No. 123
The accounting provisions of SFAS No.
123 do not have a material effect on the
Company's pro forma net loss and loss
per share and thus have not been
presented.
(f) Directors' Stock Options
One current and three former directors
have received options to purchase 10,000
units, each at an exercise price of $5
per unit, each unit consisting of one
share of common stock and a warrant to
purchase one share of common stock at an
exercise price of $6 per share. The
options are outstanding and exercisable
at March 31, 1997.
In November 1995, the Company issued to
each of its outside directors options to
purchase 10,000 shares of common stock
at an exercise price of $5.125 per share
exercisable on or after November 30,
1996. These options expire on November
30, 2000.
In April 1996, the Company issued to a
current director options to purchase
10,000 shares of common stock at an
exercise price of $5.125 per share
exercisable on or after April 24, 1997.
(g) Stock Options Issued in Connection with
the Acquisition of
Netphone
Pursuant to the terms of the acquisition
agreement for Netphone, with Electric
Magic Co. on October 9, 1995. (see Note
10), the Company issued to Electric
Magic options to purchase 50,000 shares
of common stock at an exercise price of
$6.00 per share, expiring in October
1998. In addition, the Company issued to
a third party (Omotsu Holdings Limited),
in consideration of its surrender of
rights to acquire Netphone, warrants to
buy 80,000 shares of common stock at an
exercise price of $7.80 per share
expiring August 11, 2000. (See Note 10.)
9.Supplemental Disclosures of Cash Flow Information
Year ended March 31,
1997 1996
Cash paid during the
period for:
Interest - $60,614
=======================
Income taxes - -
=======================
Supplemental disclosures
of noncash investing
activities:
Conversion of MTI
debt to paid-in
capital - 491,284
Issuance of common
stock for the
purchase of Netphone - 240,000
Issuance of common
stock for legal
services - 150,000
10. Acquisition of Netphone
On October 9, 1995, the Company acquired
Netphone, a software package, from Electric
Magic Co. in exchange for $200,000 in cash
and options to acquire 50,000 shares of the
Company's common stock valued at the nominal
amount of $500. This product allows user of
Macintosh computers to conduct long distance
conversations over the Internet for the cost
of local Internet access. The Company paid a
third party (Omotsu Holdings Limited) $80,000
in cash and issued 80,000 shares of
restricted common stock and warrants to
acquire 80,000 shares of the Company's common
stock valued at $240,000 (market value
$520,000) for surrendering its rights to
acquire Netphone.
On October 31, 1995, the Company sold
Netphone to Camelot Corporation ("Camelot")
for $193,532 in cash, 67,470 shares of
Camelot's restricted common stock valued at
the market value of $350,000 and an agreement
by Camelot to pay the Company a fee for each
unit sold by Camelot in the future. This
resulted in a gain of $23,032 included in
gain on sale of assets in the consolidated
statements of operations. On March 31, 1997,
the market value of the Camelot restricted
stock had decreased to $14,759 resulting in
an unrealized loss of $335,241, which has
been reflected in the consolidated statement
of shareholders' equity (capital deficit).
11. Employee Benefit Plan
Effective February 15, 1996, the Company
implemented a 401(k) profit sharing plan
covering substantially all employees.
Contributions to the plan are at the
discretion of the Board of Directors. The
Board did not elect to make a contribution
for the years ended March 31, 1997 or 1996.
12. Related Party Transactions
(a) During the years ended March 31, 1997 and
1996, the Company incurred fees of
approximately $24,000 and $18,000 to a
consulting firm owned by the Company's
Chairman of the Board of Directors.
(b) During the years ended March 31, 1997 and
1996, the Company incurred marketing fees
of approximately $82,000 and $72,000 to
a firm where a former Company director is
employed.
13. Major Customers
Revenues from one major customer for the
year ended March 31, 1997 accounted for
approximately 37% of the Company's total
revenues. There were no receivables due
from this customer at March 31, 1997.
Revenues from four major customers for the
year ended March 31, 1996 accounted for
approximately 64% of the Company's total
revenues.
14. Assets Held for Sale/ Discontinued operations
(a) Sale of COPERNICUS
As of May 9, 1997 the Company entered into an
agreement (the "Purchase Agreement") to sell,
subject to shareholder approval, the rights
to COPERNICUS and certain related assets to
VIE Systems Inc., a Delaware corporation
("VIE") for $2,050,000 in cash and a 5%
royalty on future COPERNICUS related license
fees payable commencing after the first 12
months. Subject to VIE's approval, the
Company will have the right to enter into OEM
agreements with VIE on commercially
reasonable terms, to incorporate COPERNICUS
within future products which the Company may
develop or acquire. Under the Purchase
Agreement the Company has appointed VIE as
its exclusive agent for the operation of all
aspects of the COPERNICUS related business .
This agreement will terminate at the earlier
of the closing of the sale or 180 days from
may 9, 1997. VIE has entered into Voting
Agreements with the holders of 68.1% of the
voting rights entitled to vote at a meeting
of Company Shareholders, and the Company
therefore expects the sale to be approved and
completed during July 1997.
As of May 9, 1997 the Company entered into a
license agreement (the "VIE License") to
license certain rights to its COPERNICUS
product and to assign certain agreements to
VIE. The VIE License gives VIE a five year
exclusive right to market COPERNICUS to the
financial services, healthcare, food and
government industries in the US and Canada.
It also allows VIE to act as a non-exclusive
distributor to all other industries within
the United States and gives VIE worldwide
non-exclusive distribution rights for all
industries until termination of the license.
Under the VIE license the Company receives a
5% royalty on all license fees received by
VIE relating to the COPERNICUS product. The
license also permits VIE to produce the
product on additional platforms and enhance
the product as it sees fit. The source code
for the product may not be distributed to
another party without the prior written
consent of the Company. Finally the Company
has assigned to VIE certain agreements,
including a distribution agreement with IBM.
This license will terminate upon the closing
of the sale under the Purchase Agreement.
Until the closing of the contemplated sale of
COPERNICUS pursuant to the Purchase
Agreement, The Company will continue to be
engaged, through its exclusive agent VIE in
the development, marketing, licensing and
support of its COPERNICUS software for large-
scale computer users. An application for a
United States patent on COPERNICUS is
pending.
b) Sale of EDI business
Until April 1, 1997, through its wholly owned
subsidiary, New Paradigm Commerce ("NPC")
(formerly New Paradigm Golden Link), the
Company operated a service bureau business
providing electronic data interchange ("EDI")
services (the conveying of business documents
electronically). As of April 1, 1997, the
Company sold its EDI business to Custom
Information Systems Corp. of New York ("CIS")
for $6,000 and a note receivable monthly over
three years with a face value of $355,000 and
a present value of approximately $300,000.
c) Discontinued Operations
The proposed dispositions of the businesses
disclosed in (a) and (b) above have been
presented as discontinued operations and the
balance sheet at March 31, 1997 and
statements of operations for the two years
then ended have been restated to conform to
this presentation. The anticipated gain on
disposal of such businesses will be included
in the statement of operations for the year
ended March 31, 1998. Financial results of
the businesses included as discontinued
operations are as follows:
Operating Data for COPERNICUS and EDI combined:
</TABLE>
<TABLE>
<S> <C> <C>
Year ended March Year ended March
31, 1997 31, 1996
Revenues:
Software fees, royalties
and licensing fees $380,671 $392,541
Consulting, maintenance and other fees 242,227 33,412
----------------------------
622,898 425,953
Expenses:
Employee costs 1,047,606 1,008,015
General and administrative 265,087 288,756
Professional fees 223,213 364,050
Marketing 323,725 523,624
Research and development - 66,979
Occupancy 20,310 20,000
Depreciation and amortization 181,276 96,335
--------- ---------
2,061,217 2,367,759
Net Loss from discontinued operations (1,438,319) (1,941,806)
</TABLE>
Balance Sheet Data
[S] [C] [C] [C]
COPERNICUS EDI Total
Assets:
Accounts receivable - net $15,995 $60,173 $76,168
COPERNICUS development costs - net 404,863 - 404,863
Patents and trademarks - net 153,629 - 153,629
Software - net 53,949 5,303 59,252
Computer equipment - net 30,792 9,081 39,873
Software rights - net 2,706 - 2,706
--------------------------------
661,934 74,557 736,491
Liabilities:
Deferred revenues 45,000 - 45,000
--------------------------------
Net Assets held for sale $616,934 $74,557 $691,491
Exhibit 11
Weighted Average Share Calculations
Common Stock at 4/1/1996 2,446,729
Common Stock at 3/31/1997 2,451,729
Weighted Avg 2,449,428
Exhibit 24
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated
opposite their respective names below, hereby constitute and
appoint ARTHUR M. MITCHELL and PETER K. INGERMAN, and each
of them, singularly, attorneys-in-fact of the undersigned
with full power to each of them to sign for and in the name
of the undersigned in the capacities indicated below (a) the
Annual Report on Form 10-KSB under the Securities Exchange
Act of 1934, as amended, of New Paradigm Software Corp. (the
"Company") and (b) any and all amendments thereto, and to
give any certification which may be required in connection
therewith .
Signature Title Date
July 1, 1996
/s/ Daniel A. CHAIRMAN OF THE BOARD OF
Gordon DIRECTORS
Daniel A. Gordon
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 328,168
<SECURITIES> 14,759
<RECEIVABLES> 50,612
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 411,267
<PP&E> 363,805
<DEPRECIATION> 194,885
<TOTAL-ASSETS> 1,357,703
<CURRENT-LIABILITIES> 1,427,817
<BONDS> 0
200,000
0
<COMMON> 24,517
<OTHER-SE> (294,631)
<TOTAL-LIABILITY-AND-EQUITY> 1,357,703
<SALES> 0
<TOTAL-REVENUES> 64,976
<CGS> 0
<TOTAL-COSTS> 1,627,163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,537,088)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,537,088)
<DISCONTINUED> (1,438,319)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,975,407)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
